Chinese Stimulus Dims Gold And Lifts Equities

China lowered the reserve requirements for its banks last week, a move tailored to boost risk taking via lending. The move has had the rather perverse effect of sending U.S. and European exchanges higher while Asian equities markets slid lower.

The U.S. dollar also benefited. This could be because it brings unwanted attention to just how shaky China’s economy is and how rigid its capital markets are, acting as an invisible brake on its economy. It is also a tacit acknowledgement that China is not alone in East Asia and has suddenly begun to feel competition from Vietnam, Malaysia, Indonesia as well as more developed rivals like South Korea and Japan. It is also feeling manufacturing pressure from the U.S. and Germany.

The higher dollar today has helped to push gold and silver down although both have come off lows for the day. The stronger dollar is accounting for more than half the loss in overall trading.

Gold bulls are still being held at bay over worries about a rate hike from the Federal Reserve. We think this is an irrational fear given that the raise will not happen until the fall and will be so fractionally small as to make almost no difference to the economy.

This is sort of like chasing a year-old rumor with no meaty facts attached, an empty suit of a notion. Without once again going into the litany of economic indicators, suffice it to say that the Fed will raise rates a) when the data truly supports it and b) when they are good and ready.

One would think that the continuing debt crisis in Greek would have dinged European equities today. We think that those markets, which rose, are communicating to the rest of the world a reading that says maybe the rest of Europe is better off without the dead weight of the economic sluggard of the Aegean.

Of course, the Greek situation has been weighing on the euro, therefore boosting the greenback. So, in that we find some of the stress on precious metals pricing.

West Texas Intermediate crude is up modestly today, no doubt seeking the $60 level at which it will find its first true crossroad. At the crossroad the question will be asked, “Will U.S. crude go on to $70 and even $75, or stay mired in the $50 to $60 range for the foreseeable future?”

Regardless, the small rise in oil had no companion effect on gold.

William Dudley, head of the New York Fed, said today at the Bloomberg Americas Monetary Policy Summit that the timing of a rate rise is still uncertain. Dudley is a loud voice on the FOMC, the policy setting committee of the Fed.

“Hopefully” economic data will “support a decision to lift off later this year,” Dudley said, in reference to making the first move to push interest rates off current near-zero levels.

But, “because the economic outlook is uncertain, I can’t tell you when normalization will occur.” When it comes to rate rises, “the timing is data dependent. We will have to see what unfolds,” he said. He said that raising rates out of current basement levels “does not mean that U.S. monetary policy will be tight” after the first rate-increase.

However, he did add that the Fed is looking at an eventual “neutral rate” of 3.5% down the road.

We should all ask what that would mean for safe-haven plays.

Wishing you as always, good trading,