Gold prices in Asia came in mixed on the morning of Sep 27, despite having shown slim gains on Sep 24 when “investors weighed the potential fallout from the debt-laden China Evergrande versus the hawkish stances of central banks,” notes Avtar Sandu.

The commodities expert from Phillip Futures cautions that the distress over Evergrande could now spill over into the broader economy.

For one, the Chinese company’s electric car unit has cautioned of an uncertain future, unless it receives a swift cash injection.

To this end, Comex gold futures for December delivery closed at +US$1.90 at US$1,751.7 an ounce ($2,370.9) on Sep 24.

The metric was also impacted by hawkish comments such as from Federal chairman Jerome Powell who signaled the central bank’s plans to withdraw the extraordinary support measures it pumped into the economy, by November.

December gold prices fell to below US$1,740 an ounce, after having hitting a high of US$1,788.4 an ounce in the week prior.

“Savvy gold traders may have guessed the Federal Open Market Committee meeting outcome [on Sep 22] and traded around the clique ‘buy the rumour and sell the fact’ and could be covering their positions and taking some profit off the table,” Sandu writes in a Sep 27 note.

A key issue of concern is the mounting problems that Evergrande has been facing since May.

“With hardly any sign of a bailout from Beijing and with the huge crushing debt, Evergrande problems have seemed gigantic even outside China, concerns have heightened that any collapse could hurt not just China's economy but the contagion could spread to markets beyond China,” observes Sandu.

He adds that the crisis so far has not been totally reflected in the price of gold, especially since the yellow metal is considered a safe haven asset of sorts among Asians.

“The bet so far is that that the damage is going to contained even in China by the Chinese authorities and regulators yet not all investors are on the same wavelength as Evergrande may not be too big to fail and Beijing may let the crisis drag on as priority is place on completing unfinished building rather than meeting creditors dues,” adds Sandu.

There also another imminent debt crisis: US debt ceiling.

Funding for federal agencies may well run out on Oct 1, thus pushing the White House to caution these organisations to prepare for a government shutdown. With this, there will probably be a partial shutdown of the federal government.  

Meanwhile, the US Treasury has warned that it will run out of money to pay for the government’s bills by mid-November if Congress does not raise or temporarily lift the nation’s borrowing limit.

Sandu is of the view that central banks, like the Fed, would most likely begin to taper their bond purchases before tweaking rates given the threat of a faster-than-expected rise in inflation rates.

Against this backdrop, he remains bullish on gold for the long-term despite the pressures from rising global government yields and the dollar.

“Although gold has lost much of its appeal for investors in 2021 as compared to 2020 and the technical picture has deteriorated in favour of the bears rather than gold bulls, deep corrections of prices are still viewed as buying opportunities,” Sandu explains.

Cover image: Bloomberg