21.09.202108:35 Forex Analysis & Reviews: Gold rises on falling global stock markets, but downside risk still remains

Yesterday, gold prices rose for the first time after three days of declines. This came amid the fears on Asian real estate developer China Evergrande Group debt woes.

On Monday, global stock markets fell after it was reported that Evergrande, China's second-largest property developer, was in crisis. It has obligations of more than $300bn to creditors and other businesses and is on the brink of default.

Analysts believe that Evergrande's possible bankruptcy could have a negative impact on global stock and financial markets. Amid the concerns that the Chinese real estate giant will be unable to meet their debt obligations this week, the Hong Kong stock exchange index down 3% on Monday.

The Dow Jones Industrial Average closed 1.78% lower on Monday. The tech-heavy Nasdaq Composite fell 2.19%, while S&P 500 dropped 1.7%. This significant decline in investors' risk appetite provoked an increased demand for safe assets.

At the beginning of the week, gold futures delivery settled at $1,763.80 on the New York Stock Exchange COMEX. The price was up $12.40, or 0.7%, rebounding from last week's setback. The metal lost more than 2% of its value.

During the past seven days, the precious metal was under pressure from strong economic statistics from the US. The data showed that the Fed may start tapering its asset purchases in the near future.

In the run-up to the September meeting of the US regulator, the possibility of an imminent tapering of asset purchases is still a cause for concern. This is what is currently holding down gold prices.

BBH analyst Mark Chandler believes that bullion is not getting as much support as would be expected from lower yields and falling equities.

At the same time, his TD Securities colleague Bart Melek noted that the attractiveness of gold is not as high right now because investors are more interested in holding cash ahead of a potential liquidity crisis.

The expert suggested that traders seemed to be hoarding cash. He believes that although gold is a safe haven asset, it is more profitable to hold US currency.

Despite the growing liquidity problems affected the Chinese markets, US investors remain focused on the Federal Reserve and a possible change in its monetary policy. Expectations that the Fed will announce asset purchase cuts at the upcoming meeting support the US currency. This puts downward pressure on gold.

Ole Hansen, an analyst at Saxo Bank believes that at this stage US monetary policy is a more powerful pricing factor for the gold than volatility, as investors do not yet know how strong the impact of an Evergrande default will be on the global economy.

Hansen also added that despite the recent rise in gold prices, precious metal market sentiment remained bearish as prices had failed to keep above the critical resistance level.