Gold prices are up sharply in early action on Tuesday as U.S. equity markets plunged. Gold is now trading at a three month high as risk aversion takes center stage.
Market volatility, as measured by the CBOE’s VIX index, is up again today rising by nearly three percent. As of this post, the Dow Jones Industrial Average is down 435 points while the tech-heavy Nasdaq is shedding 180 points. Price action is simply ugly, and the day’s selling has the potential to accelerate further.
All Eyes on China
Chinese stocks saw heavy selling yesterday following two days of strong gains, with the benchmark Shanghai index declining by nearly 2.3%. The potential for a further slowing of the Chinese economy is certainly taking a toll, despite some reassurances from Chinese officials.
The ongoing trade war between the U.S. and China is likely having a significant negative effect on the Chinese economy and Asian markets. Little to no progress has been made on the issue in recent weeks, and both sides appear to have dug their heels in for the long haul. Further weakness in China has the potential to spill over into global markets, and with the recent weakness in Chinese GDP, the nation is likely to remain a focal point for investors.
Geopolitics Fueling Risk Aversion
The current geopolitical backdrop is not doing stock investors any favors. In addition to concerns over China, investors are also grappling with the ongoing saga over the murder of a journalist in the Saudi Arabian embassy in Turkey. Last night, the Turkish president went on television to discuss the matter, and according to a report by the Washington Post, he said the attack was planned and called for the extradition of Saudi suspects.
U.S. President Donald Trump has been cautious in dealing with the matter as calls for an explanation and justice are on the rise.
The current mix of concerns over China, U.S./Saudi tensions and budget troubles in Italy appear to be giving investors plenty of reason to book profits.
Today’s price action in U.S. markets could be indicative of a fresh leg lower in prices. The benchmark S&P 500 has now broken key chart support and this technical breakdown could fuel further selling.
The combination of geopolitical risks and lower stocks is fueling buying in gold, which has cleared some resistance to trade at a three month high. The current momentum in the market may draw additional buying interest from technical traders and investors on the sidelines who have been waiting for market strength to enter. The next major test for the bulls could be resistance in the $1275 area.
Gold Price Chart
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