Gold Surges To 6-Year High On Contraction In US Manufacturing
Zacks Investment Research | Sep 03, 2019 10:24PM ET
Gold prices surged to a six-year high as manufacturing activity decelerated in August for the first time in three years, renewing fears of an economic slowdown. Gold prices were at $1,546.08 an ounce on Sep 3, gaining 1.1% in a day. The yellow metal has gained 21% so far this year on the back of a dovish fed, safe haven demand triggered by ongoing trade war between United States and China, and concerns over the global economic outlook.
Per the Institute for Supply Management’s latest report, Purchasing Managers’ Index (PMI) for August declined to 49.1% from 51.2% in July. Notably, new orders, production and hiring have declined sharply. Even though the manufacturing sector has been decelerating for the past four months — this was the first instance where the reading has gone below 50. This marks the end of 35 straight months of growth for the manufacturing sector.
This raises anticipation of further rate cuts by the Fed, which will eventually work in gold’s favor. Lower the interest rates, the lesser will be the opportunity cost of holding non-yielding bullion, making gold attractive for investors holding other currencies. Further, volatile stock markets, uncertainty on the Brexit front, and protests in Hong Kong will fuel gold prices. Moreover, with the U.S.-China trade war showing no signs of abatement, investors remain jittery, which in turn will work in favor of gold.
The prospects of a dwindling supply looms large on the gold-mining industry while demand remains strong with India and China acting as the major drivers. Further, the last few months of the year are seasonally stronger in India due to wedding and festive seasons. The combination of lower mined gold supply and higher demand, and geopolitical tensions could eventually drive prices north, which bodes well for gold-miners.
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