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China Blues Help Gold While Hurting Equities

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China is admonishing its high-flying investors, big and small, to lay off extreme borrowing or selling property to buy stocks. Essentially, the centrally planned economy is talking down speculation (especially on OTC stocks) and is going to restrict margin buying. As an indication of how crazy trading in China has gotten, in March alone 4 million small-investor retail accounts were opened. Smells like tulips to us.

Additionally, regulators are going to make it much easier to bet against Chinese stocks.

This is already being called the “China put.” It’s unsettling to equities globally because no one knows how it will affect the Chinese economy or sentiment in other markets like New York, London and Frankfurt.

The Dow was down 350 today at one point on this news although it has bounced off its lows closing off by 279.67 points on the day. The S&P 500 and NASDAQ followed the pattern. The German DAX was off by more than 2.5%. The Shanghai index was curiously untouched. The news may have broken too late on Friday to effect it much as it rose to fresh 7-year highs.

U.S. inflation data that is difficult to interpret kept gold from surging on the weaker equities. Inflation rose to an annualized rate of 2.4%, at or above the Fed target. That was just strong enough but just weak enough to cause confusion about where Federal Reserve interest rates might be heading.

No matter how we parse it, there is a rate hike coming. Any reprieves for gold based on the idea that a rate increase will be pushed back will be short lived. On the other hand, many analysts and investors have already baked in the rate hikes to their calculus. So, while gold rose for the day, it was lethargic.

Gold also received a modest boost from a decline in the U.S. dollar. Currency markets were also wrestling with the Fed rate issue and seemed to settle, as most people have, on a late-2015 increase of 0.25%.

The energy complex, despite the decline of the dollar today (which should push prices up), was down from West Texas and Brent North Sea crudes to natural gas. Oil should no longer be considered a bell-weather for gold. They are completely uncoupled regarding prices.

Oil is very much in the same boat as gold, though. It is stuck in a range with the additional threat that as soon as it gets too expensive U.S. producers will up their output or even increase it. $60 seems the most likely major resistance point, although the mid-$50 range seems more likely for a while.

Another hit to equities came through other events in Europe. It may be too early to call the outcome of the game, but it appears that Greece is going to leave the euro system. That damped appetite on Friday.

Moreover, Bloomberg information terminals experienced an outage and that rippled around the world and made a slow trading Friday even slower.

Markets are puzzled. Until we get clear-cut news from the U.S. economy that will allow the Fed to make a definitive move on rates, look for more days like this.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer