The Big Buck

The Big Buck

In spite of further Federal Reserve tapering to QE3 announced yesterday, the dollar surged higher, functioning as a safe haven as the U.S. economy hit a 3.2% growth rate for the 4th quarter of 2013.

That growth was the best in 10 years. 

Growth in the second half of 2013 came in at 3.7, up sharply from 1.8 percent in the first six months of the year. It was the biggest half yearly increase since the second half of 2003.

Consumer spending was the main driver of fourth-quarter growth, rising at a 3.3 percent rate, the strongest since Q4 of 2010. There was also vigor in other segments of the economy such as trade and new business-oriented investment. 

Then there is the matter of China and its unexpected contraction. It is unknown yet - and may remain unknown - what exactly was the cause of the manufacturing contraction there. Both the U.S. and some areas of the euro zone have been turning in positive factory reports. China's problems could be traced to Brazil, which is one of the "fragile five" emerging economies that has run into problems of late as more investment began heading toward highly developed nations. (The other members of the fragile five are Turkey, South Africa, India and Indonesia, FYI.)

It could be that older figures were merely inaccurate and we are reading an adjustment in the slippery China figures, or there is something bigger going on. Regardless, the slowdown has affected gold buying in the Asian giant.

Gold prices globally have indeed abruptly changed course recently due to fears of an emerging-market crisis and the sharp decline of equities on Wall Street in January.

"While the escalation or abatement of [emerging markets] concerns in coming weeks is difficult to predict, we recognise that this could present upside risk to gold should the jitters continue," ANZ strategist Victor Thianpiriya said. "Nevertheless, the gold market will be absent one major supportive factor over the next few weeks - China."

Thianpiriya further explained that the precious metal is about to lose "a major price support" as China winds down for the Lunar New Year and demand dries up in the coming weeks. The Lunar New Year, which begins on Friday, is seen as an auspicious time to buy gold, but that buying is about done.

It is widely believed that in the run up to the celebration of the Year Of The Horse, jewelry demand rose only moderately in the world's second-largest economy ahead of the celebrations but are now on the decline headed toward a return to normal levels.

As the world, and especially the developed world, returns to economic normalcy, there is bound to be a lot of volatility in all markets. If tomorrow earnings reports of major companies turn down, the equities will plunge as will the dollar and gold will take over. 

When people were losing their shirts in 2008 into 2009, everyone shouted that Western-style industrial democracy was over and Wall Street was DOA. The case turned out to be quite the opposite.

The same is true for gold. It is searching for its direction, which, middle-and-long-term, will be up. Gold traders need to be as patient as equities traders were when the stock markets melted down six years ago.