Gold Rallies Again Amid Chinese Stimulus Flop

Gold prices took off again, edging closer to the psychological US$2,700 mark for the first time. Market observers are keeping a close eye on China as a potential catalyst for further gains.

Chinese equities have been in decline, retracing their significant October rally. Chinese officials hinted at a major announcement to support the struggling real estate sector yesterday, generating hope and putting brakes on the stock market fall. However, the actual measures announced did not impress anyone and there was a sharp sell-off in property stocks after the announcement.

In recent history, Chinese investors have favoured real estate and stocks, but they have kept gold as a close alternative after seeing it survive thousands of years of economic swings and crashes. When opportunities in real estate or equities appear viable, investors tend to prioritise them over gold. The recent rapid rise in Chinese stocks left many retail investors unable to capitalise on the rally. In fact, such rapid climbs can have the reverse effect because they lure in retail investors on the peaks, then retrace downward leaving them in large losses. The investors must either wait out the dip or panic sell and take the painful loss. This is the main reason why pump-and-dump schemes are illegal. It looks like Chinese retail investors know this very well and will need more convincing.

The real beneficiaries of the recent government-induced pump would be the companies that received free money to buy their own shares and the brokers that were given highly attractive loans to pump stocks and then take profit. Looking at Chinese equities now and comparing them to the gold chart, it is obvious that gold's steady rise looks less volatile and potentially more reliable than the manufactured stimulus that has continued to fall short.

The resilience of gold, despite rising U.S. Treasury yields, further underscores its attractiveness. The relationship between China and gold seems to be intensifying, serving as a primary driver of the ongoing rally.

While the possibility of major stimulus from China could shift this dynamic, the market unsurprisingly remains sceptical, since all measures up to now have been critiqued as being not enough. It looks like the positive sentiment around announcements made by the government has faded, and it may prove difficult to cause another pop higher in markets unless solid changes are made.

In that case, those unwilling to play the game of guessing where the new, inflationary money will flow may simply opt-out and choose gold as an inflation hedge.