The Daily Market Report
Gold Weakens on China Concerns
12-Mar (USAGOLD) — Gold is under modest pressure on Monday, having been unable to sustain the rebound back above $1700 late last week. Aside from the normal raft of economic issues domestically and in Europe and Japan, concerns about China are starting to mount.
China reported $31.5 bln trade deficit in February as a result of much higher than expected imports. Import growth surged to 39.6% y/y, while export growth was less than half that amount at 18.4%. This was the biggest reported deficit in 22-years. The PBoC reacted immediately by setting the midpoint of yuan’s acceptable trading range sharply lower at 6.3282. It was the second biggest one day cut on record.
A Reuters article said, “Traders and analysts said the PBOC appears to be preparing the domestic and global markets for sharper fluctuations to eventually widen the yuan’s daily trading band.” Given that it happened on the same day that a large trade deficit was reported, call be suspicious. I think they were simply sending the signal that China intends to keep its goods and services relatively cheap, by constraining the upside in the yuan.
The reaction in gold was somewhat muted because the undertone of a slowing Chinese economy is that the PBoC will move toward an easier stance with perhaps a healthy dose of fiscal stimulus to boot. This is consistent with the steps taken by the Western economies in recent years; the central banks push rates lower and offer accommodations, and if necessary the government provides fiscal stimulus as well. While the political will for further direct stimulus has waned significantly in the West — as the political landscape has shifted — that’s not of any particular concern in a country like China; that is until inflation rears its ugly head. If China jumps back on the already crowded bandwagon of monetary accommodations, bailouts and stimulus, just imagine what the longer-term inflationary repercussions might be.
The Fed’s FOMC meets tomorrow in a one day meeting. Rates are on hold at 0% at least through late-2014. There was some escalated discussion last week about the possibility of QE3 in the wake of one-day retreat in the stock market. I think that’s reflective of just how edgy investors are right now. As evidenced by a WSJ article and a Washington Post article today, people are beginning to wonder if recent gains on the employment front are sustainable in light of the continued sluggishness in economic growth. While the Fed may not announce new quantitative measures tomorrow, pressure is already building for them to do more.
