Gold is not typically a primary consideration when evaluating risks for Hong Kong’s Hang Seng Index, and vice versa. However, over the past month, the two have exhibited a notable correlation, hinting at more than just a coincidence. With Chinese interest rates at near-record lows and property prices still struggling to reach previous peaks, could the lackluster returns from traditional assets be encouraging speculative investments in more accessible markets?
Examining the Gold-Hang Seng Correlation
Tight correlations between markets are not unusual, but they often occur by chance rather than as a result of a direct connection between the variables. At first glance, the recent correlation between gold and Hang Seng futures might seem to fit this description. However, a deeper analysis reveals that, over the past month, the correlation coefficient between gold and the Hang Seng has been a striking 0.91, while the correlation with Hang Seng Tech futures is even higher at 0.93. This suggests a strong, consistent alignment in their movements.
But does this correlation carry any weight? It appears so, particularly when considering the growing participation of Chinese investors in both markets. Demand for gold bars in China has surged in recent weeks, while Hong Kong equities have seen strong capital inflows from mainland investors. These developments, widely reported in the media, suggest a connection between the two markets. Of course, there are other factors at play in both the Hang Seng and gold, such as US import tariffs and market developments like DeepSeek, but it is not uncommon for exuberance in one asset class to spill over into others that are accessible to Chinese investors.
With Chinese government bond yields near record lows and home prices under continued pressure, traditional investment options in the country are becoming less attractive. This environment is likely fueling capital flows into alternative markets, including Hong Kong stocks and gold. If this trend continues, the correlation between gold and the Hang Seng could remain strong, with price movements in one market offering potential insights into the other.
Gold Facing Potential Resistance
Despite a strong uptrend in gold prices, recent price action suggests that the rally may be nearing its peak. Last Friday, gold failed to surpass its record high of $2,942.70, forming a key bearish reversal candle. Although recent reversal patterns have not always led to significant pullbacks, there are signs that the bullish momentum is losing steam. The Relative Strength Index (RSI) has broken its long-standing uptrend, and while the Moving Average Convergence Divergence (MACD) indicator has not yet confirmed this, it too seems vulnerable to a potential downturn.
Gold remains in an uptrend, but the latest price action indicates a potential near-term top following its rapid rally in early 2025. Currently, support around $2,882.40 is preventing a deeper pullback towards the uptrend support at $2,850. A break below this level could see a retest of $2,790, challenging the bullish outlook for the near future. Conversely, if the $2,882.40 support holds, a further push toward new record highs could be on the horizon.
In summary, while the recent correlation between gold and the Hang Seng is compelling, the direction of gold prices in the coming weeks may provide crucial clues for investors tracking both markets.
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