Gold Is Tripped Up By Higher Oil and Stronger Equities

It’s easy to define the “what?” and the “how?” of today’s markets. Let’s start with the astounding leap in oil. The “why?” will be elusive? But do read on. The answer is below – far below.

At 4:00 in New York West Texas Intermediate is up 10.45% while Brent North Sea is up 9.00%. The lightning strike is based upon continuing belief in the rumor instigated by the United Arab Emirates’ oil spokesperson that OPEC may have reached an agreement to cut production to shore up prices.

Venezuela and Russia couldn’t talk Saudi Arabia into production changes. Let’s see if the UAE can. Their claim is that with production cuts – particularly in the U.S. – the market will rebalance. There are only two things wrong with this scenario.

Supply in January fell by only 300K barrels per day but demand fell so drastically that a net surplus of over 1 million bpd was created above and beyond the 1.7 million per day excess already in place.

Regardless if today’s booming rise is real or not, it affected everything in sight.

In response to the gains in crude and consequent strength in U.S. and European equities, gold fell in late afternoon to $1239 per ounce. See Market Forecast and Proper Action for comments on the aftermath. Silver fell, although not as drastically.

U.S. equities rose up to 1.80%. The struggling NASDAQ, which has some harsh analytical light glaring on it, rose about 1.60%. The question that will now confront trades is whether stocks are undervalued and therefore, is the strong and long “correction” over? We don’t know right now.

Europe fared even better than the U.S. markets today. The London FTSE was up over 3.00% while the DAX and CAC, Germany and France, rose about 2.45%.

The Nikkei was down almost 5.00% again today, falling drastically in the last six out of seven sessions.

"The idea that central banks are now fully targeting the interest rate structure and putting a gun to domestic banks heads in a fight to stoke credit growth is in no way an equity friendly story," wrote Chris Weston, chief market strategist at IG, a London spread-betting house. The Bank of Japan shocked the banking world with a turn late last month to negative interest rates.

That may be good long term for Japanese borrowers from businesses to consumers, but spending stimulation, regardless of its form, takes a long while to work its way through the pipeline.

U.S. bond yields, which stated out the day in the 1.60% range, moved up to a more comforting area, 1.73%. The rate rise indicated, as did gold’s stumble, of a shifting of money toward equity play and away from safe havens.

The Commerce Department said today that retail sales excluding automobiles, gasoline, building materials and food services (the so-called core) increased 0.6% last month after an unrevised 0.3% decline in December. Those naughty consumers waited for January after-Christmas sales to spend their money.

This seems to have inspired thoughts that the Fed might indeed be willing to raise rates again sooner rather than later. That kind of thinking pushes up the U.S. dollar, which ended up strong against the whole foreign currency basket, but especially toward the yen.

Wishing you as always, good trading,