Gold Prices Rise on China Worries, Weak Dollar

By Tatyana Shumsky 

        Gold prices pulled up from five-year lows on Monday after a rout in China's stock market reanimated investor interest in the haven asset.
        The most actively traded gold futures contract, for August delivery, was recently up $11.70, or 1.1%, at $1,097.20 a troy ounce on the Comex division of the New York Mercantile Exchange.
        Gold prices have been plumbing five-year lows as investors sold holdings of the metal on anticipation that the Federal Reserve would raise benchmark interest rates for the first time in nearly a decade. The Fed's  easy-money policies benefited gold, which doesn't pay interest or dividends and has an easier time competing with yield-bearing assets like bonds and stocks when rates are pinned near zero. Now that the U.S. central bank appears close to increasing borrowing costs, the precious metal is losing its appeal to some investors.
        A violent decline in Chinese equities prompted some investors to buy gold on Monday. The Shanghai Composite Index fell 8.5% on Monday, its worst daily percentage fall since early 2007, on worries that authorities were cutting back measures to prop up the share market. Authorities had been funneling money toward equities to help stem the downdraft that pushed stocks down more than 30% off their June highs.
        "It's not the Chinese who are buying the gold. Right now they have bigger problems. It's traders who are watching what's going on in China and they're saying could it happen here," said George Gero, a senior vice president with RBC Capital Markets Global Futures in New York.
        Some investors believe gold will keep its value better than other assets during periods of global political or economic upheaval and buy the precious metal as a hedge.
        A weaker dollar also burnished the metal's allure to foreign buyers. The Wall Street Journal Dollar Index was recently down 0.5% at 88.02. Gold is traded in dollars and becomes less expensive to buyers who use other currencies to fund their purchases when the greenback weakens.
        Gold prices are also getting a lift from options traders, who are buying gold futures to offset potential liabilities in option markets. A large number of options contracts that protect holders against a price drop below $1,125 and $1,100 are set to expire at close of business Tuesday. If futures prices trade below $1,100, for example, holders of that option contract will receive bullish futures contracts allowing them to sell gold for $1,100 on Tuesday night. But if prices are higher, the option expires worthless.
        Option traders often buy futures contracts ahead of expiration date to offset their risk, but the additional purchases can lift futures prices and help the options expire worthless.
        "All of this is bringing buyers to the market," Mr. Gero said.
        Still, gold's gains were muted as some investors pared positions ahead of the Federal Open Market Committee meeting, which begins Tuesday and wraps up Wednesday. The Fed's policy-setting arm is due to deliver a monetary policy statement on Wednesday afternoon, and investors will be sifting the communique for any changes to the Fed's assessment of U.S. economic health.
        Most price economists surveyed by the Journal think liftoff is likely at the Fed's September meeting, though many investors believe the policy makers will wait until December.
        Write to Tatyana Shumsky at tatyana.shumsky@wsj.com
        (END) Dow Jones Newswires

        July 27, 2015 10:56 ET (14:56 GMT)

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