The Daily Market Report: Gold Consolidates Near Midpoint of Recent Range Amid Mixed Queues

27-Aug (USAGOLD) — Gold is consolidating near the midpoint of the recent range. The safe-haven bid has softened somewhat in the last two sessions as stocks rebound from the massive rout earlier in the week. A stronger dollar is also conspiring to limit the yellow metal’s upside somewhat.

Despite its sizable rebound, the DJIA remains below the halfway-back point of its steep plunge from the record high set back in May. Considerable doubts remain as to whether the recent drop was a mere correction in the long-term uptrend, or a rotation into a bear market.

One thing most investors seem to agree on is that higher than normal equity market volatility is likely to persist for some time to come. In fact, uncertainty about the Fed’s next move is likely contributing greatly to this situation.

The Chinese certainly seem to think so. A PBoC official said today that the yuan devaluation should not be made a scapegoat for the global market rout.

“China’s exchange rate reform had nothing to do with the global stock market volatility, it was mainly due to the upcoming U.S. Federal Reserve monetary policy move.” — Yao Yudong, Head of PBoC’s Research Institute of Finance and Banking

“We were wronged,” Yao added. But then he politely asked the Fed to take the rest of the world into consideration and defer lift-off to some future date.

“So we hope the Federal Reserve could further delay its interest rate rise, giving emerging markets ample time to prepare. The Fed should not only consider the U.S. economy, but should also consider the global economy which is very fragile.” — Yao Yudong

KC Fed hawk Esther George acknowledged in an interview that recent market volatility “complicates” any decision to raise rates. She also agreed with the PBoC, that rate hike expectations may indeed be contributing to market volatility. “I think [Fed policy] has an influence on it,” said Ms. George.

George also thinks that volatility is likely to persist, along with disinflationary pressures, for sometime to come. That last part is salient, as a rate hike would in fact probably exacerbate those disinflationary pressures. That of course is counter to the price stability mandate and the expressed goal of generating 2% inflation.

In recent writings on this page, we have suggested that the stock market rout was more a function of mounting growth risks and the disinflationary pressures now echoed by Ms. George. While U.S. Q2 GDP was revised up by more than expected, risks of a global disinflationary depression remain.

China is still widely expected to miss its 2015 growth objective of 7%. Japan contracted in Q2. Europe is tenuously clinging to very modestly positive growth numbers, but even Germany — the shining-star of Europe — posted just 0.4% growth in Q2. While today’s U.S. revision was a beat, that’s coming off +0.6% in Q1 and looking ahead to a Atlanta Fed GDPNow forecast for Q3 of 1.4%.

The message here is that proper portfolio diversification is probably more important than ever at this particular juncture. Given the recent price action in gold, laying in some insurance in the form of physical metal, is still cheap.