Many, Many Moving Parts

Many, Many Moving Parts

Gold initially rallied toward $1,280 an ounce after some figures implied that Chinese gold imports from Hong Kong surged to a record high in 2013. 

However, the precious yellow metal tumbled about $25, (2 percent), from its high in New York afternoon trading. U.S. equities reversed early losses, halting last week's heavy pullback, a direction that had benefited gold. 

The real story lies in fears about the impending FOMC meeting tomorrow and Wednesday. The near sociopathic obsession with tapering is twisting markets this way and that, when, in fact, the tapering and eventual unwinding are not nearly as significant as analysts and traders make them out to be. However, their perceptions, as shabby as they may be, help to drive the markets fundamentally.

"Weakness across emerging markets, the US dollar, Treasury yields and equity markets helped gold break $1,270 on Friday," UBS said in a head-of-week commentary. "Despite this friendly environment for safe havens, gold's response was muted and short-lived - an appropriate reaction we consider in a macro environment that remains too challenging for a higher gold price," the bank concluded. 

Indeed, we have more often been citing T-yields as part of a battery of barometers everyone should watch. Of course, we are all watching the behavior of the stock markets, trying to discern whether money is flowing in or out of equities. The emerging markets "crisis" deserves to have quotation marks around it. While the slowdown in second-world countries has been notable, there are a few main culprits pulling down the average. Losses are not being seen in every single emerging market economy. If that were happening, then we'd have to look at a possible credit crunch, a glass ceiling, or even the strength of the economies of highly developed countries. Or even just a change in the direction of the winds of sentiment.

Barclay's says that among the key relationships to track in 2014 are the US dollar, US 10-year treasuries and macro data releases. These correlations "when viewed in sum, imply further downside for gold this year," the bank said.

"Gold prices have been highly correlated with FOMC announcements, as high as -66% since the beginning of 2013, making any surprise in FOMC announcements an important factor for gold." Long and short, someone making $700K per year just told you to keep an eye on the Fed.  

Macro data is perhaps the most intriguing of that trio above. What might happen if the U.S. economy falters for 2 or 3 months? What if unemployment goes up? (Hard as that is to imagine.) 

Troubled equities are indeed a gold bull's friend. But, as we have said so often, before we get back on an upward turning track, we will have to see more inflation, and a lot of it.