China's Data Support Gold and Oil

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.

But these trends could see additional changes, once the Federal Reserve announces plans to cut back its monthly asset purchases. The prospect of reduced stimulus is a clear negative for stock markets, which are inversely correlated to gold's price fluctuations. Thus any decline in equities would send large sections of the market looking for an alternative store of value, and this would leave gold looking more attractive than at any other point this year -- especially given the cheaper valuations that are now in place.

Early evidence of a developing trend scenario of this type can already been seen. The SPDR Gold Trust ETF posted gains of nearly 7% in August, while the S&P 500 declined by more than 4% during the same period.

Going forward, market sentiment in gold and the rest of the commodities space will be determined by the level of uncertainty in the market. Potential conflicts in the Middle East and free-falling currencies in emerging markets (particularly in India and Indonesia) create a supportive scenario for commodities, and improving macro data in China is bullish, when looking at things from a demand standpoint.

In any case, it is looking much more likely that the yearly lows in gold are behind us and that oil prices will remain elevated into the end of this year.

At the time of publication, the author held no position in any stock mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Cox is based in China, and has lectured at several universities there on international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of Web sites, including MarketBulls.net, Seeking Alpha, FX Street and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.

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