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China's Data Support Gold and Oil

Stocks in this article: GLD USO

NEW YORK ( TheStreet) -- Stock performance in emerging Asia has been a global laggard for most of this year, but this week's data out of China should help slow some of those negative trends.

China's latest Purchasing Managers' Index rose to 51, an indication that manufacturing activity has reached its highest levels in 16 months. Most important, results above the 50 mark suggest expansionary conditions are in place, and this is encouraging given the 47.7 PMI reading that was posted in August.

And while China's 2013 GDP growth is expected to slow to its weakest pace in years, we have seen some modest improvements in fixed-asset investment, industrial output and exports.

All of this suggests greater emerging market demand for energy and metals, and this could lead to rallies in gold and oil into the later this year.

Exchange-traded products tied to these commodities, such as the SPDR Gold Trust ETF (GLD) and the United States Oil Fund LP ETF (USO), have seen some extreme moves in the last few months. But while the moves so far have been near mirror images of one another, improving data out of China suggest that valuations in these commodities will start travelling on a more similar trajectory.

As the world's second-largest oil consumer, China and its growth in demand are a big driver of energy prices. This year, China is expected to overtake India as the world's largest consumer of gold, so improvements in the country's central manufacturing space also will have a significant effect on metals in the fourth quarter.

Of course, the pickup in Chinese data is only one factor to consider when we look at the prospects for gold and oil. Short-term rallies in both assets have been driven by escalating Middle East conflicts, stronger physical demand in Asia and increased volatility in currency markets.

At the end of June, gold hit its 2013 low at $1,212 an ounce. Prices have since rallied 15%, but this still falls into bear-market territory (one that would require a bull rally of 20% to overcome). Earlier in the year, gold's allure as a safe haven was offset by a steadily improving U.S. economy and historically low levels of inflation.

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