Wave of selling out of China pushes gold lower, further downside eyed

A wave of speculative selling out of China sent the price of gold sharply lower early on Monday, just as investors were eyeing the potential for further downside on growing expectations for higher interest rates in the US and further advances in the greenback.

As of 1030 BST, gold futures for August delivery were holding down 1.58% to $1,114 per ounce - near a five-year low – after having bottomed out at $1,188 per ounce during Asian trading hours, following a 4% drop..

“The greenback held firm in Asia on Monday as investors looked ahead to higher interest rates from the Fed, while gold slumped as a lack of global inflation left little to hedge against,” Bill Hubard, chief economist at Bankor, said in a research note sent to clients.

Trading volumes spike, technical support seen at $1,188 and $1,045

Trading volumes on the Shanghai Gold Exchange spiked on Monday to reach approximately 900,000 lots on a key contract. In comparison, less than 27,000 lots changed hands on 17 July. The average volume thus far in July had been less than 30,000 lots, according to Bloomberg data.

From a technical point of view Hubard pointed out how that the level of $1,118 per ounce marked a level of technical support on hourly price charts.

“A large sell order pushed through in the Gold is heading lower," he said.

"We have just taken out hourly support In addition, the metal is setting lower highs. We remain bearish over the next few weeks.

“In the long-term, the underlying downtrend (see declining channel) continues to favour a bearish bias," Hubard added.

"Although the key support at $1,132 (07/11/2014 low) has now been broken, a break of the resistance at $1,223 is needed to suggest something more than a temporary rebound. A major support can be found at $1,045 (05/02/2010 low).”

Will China keep selling?

Meanwhile, in its first update since 2009 the People’s Bank of China said it owns about 1,658 metric tonnes of gold, which indicates it purchases approximately 100 tonnes of the metal each year.

“We can’t be sure about what China is going to do, the evidence is that they have been buying at a far lower pace than the bugs were expecting,” ICBC Standard Bank’s analyst Leon Westgate told Bloomberg News.

“There is no way that the PBOC will ever maintain gold as a fixed percentage of foreign reserves.”