Thinking Like The Chinese

And never the twain shall meet...

         - Rudyard Kipling

The Chinese are up in arms about the last-minute settlement struck between the Senate, House and the President. One would think that there is a propaganda spin on what they're saying in China, which is partially true, but what they really are bothered by is that the deal in Washington will do a number of things that are bad for Chinese financial projections.

First, as we saw today in spades, the dollar will weaken. Second, the yields on bonds will be driven down, which also happened today as the 10-year Treasury note slipped below 2.6%. If you were holding $1.2 trillion dollars in securities like the Chinese do, you'd be pretty unhappy, too.

The third thing on China's mind is that the U.S., their chief competitor in every arena, is going to keep challenging them in manufacturing supremacy (along with the Germans) and ranting and raving won't stop the weaker dollar from helping America stay competitive at home and abroad.

Finally, the Chinese can't understand the ripping and gnawing on the raw meat of democracy. As ugly as the last few weeks have been, the most unruly "We the people" got were over monuments and national parks being closed. Some extremists should keep this in mind when they bandy the word "communism" about hoping it will somehow stick to the Democratic Party. 

Further, after the shouting and crying, after the torchlight red on sweaty face, it is almost a lock that the Fed, which has been busy bailing out the ocean with a thimble, will keep QE3 on course, which will keep the dollar flat or declining further. This will also keep bond yields low. 

That brings us to gold. 

George Gero, precious metals strategist at RBC Capital Markets, reported that gold open interest fell on the D.C. deal even as gold futures rose, meaning that traders were closing out their short positions. Gero said that people made debt ceiling bets by trading gold and stocks as a unit:"One could have been a hedge against the other. If you've been using [gold] as a trading vehicle, you want to get out, because there's no more reason to be on the short side of gold," he concluded.

Other analysts said the dollar was the issue.

"Now that we have reached an agreement on the debt ceiling, it's just a big unwind - people are flooding out of the dollar and covering all their shorts in gold," said Phillip Streible, senior commodities broker at RJ O'Brien. 

Although early in the day, equities were buffeted, the Dow closed essentially unchanged while the S&P and NASDAQ were both up around 0.6%. Perhaps the deal was what all the markets were waiting for. (However, even in spite of the dollar's dip, crude was down, stepping away from the trading direction it traditionally shares with gold. Crude is poised to dip below $100 per barrel right now, but that may be unassociated with the events in Washington and more due to plenty of supply.)

Yet, there is something to worry about in gold. Another inexplicable lurch - this time upward - was seen in the overnight markets. We have seen what appears to be a large player, or two or three, enter the market and turn a trend on a dime. 

We can be certain that in the next twelve days, jitters will return to the gold market as analysts and traders worry that the Fed via the FOMC will do something unexpected. 

Unless there is a big surprise lurking in the as-of-yet-unreleased September labor report, that kind of thinking is just twisted. But it could knock a percent or two off gold as prices try to rise. Gold is up almost 3% and silver over 2% as of 4:30 New York time today. 

The Chinese were spooked by inflationary smoke in the wind. Gold may have taken that wind as a favorable one and sailed a bit. 

Wishing you as always good trading, 

 Gary S. Wagner - Executive Producer