Gold May Be Discovering A Mind Of Its Own

The U.S. economy has given us some weak data points in the last two weeks as we discussed over that course of time in our fundamentals section. Employment remained soft into April; retail sales are very soft; manufacturing has been spotty.

Yet, consumer confidence remains high; the unemployment rate is going down; weekly employment numbers appear to have been strong in the last few weeks; and the shock of lower crude prices is finally being wrung out of equities markets.

The data points to a longer horizon for a Fed interest rate rise and gold is reacting accordingly. Of course, today that is anomalous. Equities are up significantly in early afternoon trading.

In spite of gold’s recent rise, however, we are facing trouble at the top of its range, now reckoned to be around 1225. In fact, gold has come off of its high of 1228 and is trading at 1222 to 1223 at 4 o’clock New York time.

The dollar slide may be coming to a halt, as well. The same analysts who have recommend bidding up gold also have been recommending squeezing the dollar. The smallest tangible rise in economic vital signs in the U.S. will reverse those two trends faster than you can say Ben Bernanke.

We are also apparently at the end of a readjustment of bond yields. For some time, the disparity between German issues and U.S. issues was approaching 1.9%, far too high for similar economies in the developed world. The disparity is now down to a more sustainable 1.5%, about where it ought to be to turn the wheels of capital.

We should also consider that the euro zone’s long term prospects and the euro currency are facing tough times, even without the white water rapids provided courtesy of Greece. It will be some time before the machinations of the European Central Bank – quantitative easing and other remedies – show any effect on the economic group as a whole. As the effects kick in, the dollar will strengthen and the euro will weaken.

We also watch the telltale signs of China’s weakening economy. When you play in the big leagues, which China now does, once you run out of credit, you run out of credit. One thing that is high on our radar is China’s adventurism in the China Sea. While the developed countries consider it strictly as a strategic challenge, no doubt the commissars in China see it as having the wonderful secondary effect of goosing up national pride and thus serving as a distraction to economic troubles.

Why drag this into today’s discussion? As the world’s second or third largest economy, if that country falters too much, the world economy suffers. It effects all of Asia, Japan, South Korea, and Australia and Brazil to boot.

That would boost the dollar’s value and spell more trouble for gold.

Wishing you as always, good trading,