Morning Market Update July 9: Gold Gains Against Strong Dollar

July 9th, 2013 by

Gold is showing strength, rising to near a 1 week high despite the downward pressures being exerted by a U.S. dollar that is near a three-year high. While some short covering and bargain hunting is being seen, one major factor overnight was the report that Chinese consumer inflation rose 2.7% in June, up from 2.1% in May. Analysts had expected it to rise to 2.5%. June’s number is still below the 3.5% threshold set by the Chinese central bank.

This news saw gold make a $12 gain in early Asian trading, and ride the wave through to the New York open.

Back to China, in addition to the rise in the consumer price index, the producer price index fell for the 16th straight month, a result of factory slowdowns. The Peoples Bank of China is expected not to change policy in response to either of these events, as its major goals right now are to induce consolidation in over-capacity industries, and to fight the real estate bubble.

Chinese stocks closed essentially flat, gaining 7 points in Shanghai. The Nikkei rose almost 2.6% to a 5 1/2 week high, and the yen stayed over 101 to the dollar. Hong Kong stocks were up a modest 0.5%.

In Europe, stocks saw some profit taking, while the euro recovered very slightly from recent lows. The very strong dollar is the major pressure on the common currency. Greek and Portuguese bonds stabilized after the Greek government reached an agreement over an extension for meeting terms to receive more bailout money.

The dollar remains near a three-year high, as will most likely see more strength this week when the minutes of the June FOMC meeting are released. The minutes are expected to re-emphasize the differences between the Fed’s plan to reduce quantitative easing by tapering off its bond purchases, while the ECB and Bank of England have recently re-affirmed their dedication to keeping interest rates artificially low.

Oil hit a 14-month high yesterday, but has eased off in some mild profit taking. Worries over violence in Egypt, which might affect the Suez Canal, has eased over news that a major Libyan oil terminal and Iraqi oil pipeline are returning to service.

U.S. stocks opened higher on expectations of a good earnings season, led by aluminum giant Alcoa beating analysts estimates. Eyes will be on today’s Treasury auction, as bonds yields have basically doubled since May.

Gold is showing surprising resilience against the strong dollar, and bears watching. Should the dollar weaken, or international events lead to more safe haven demand, we might see a testing of the $1,270 level. People forgetting that they have already priced in Fed tapering, and overreacting to the FOMC minutes on Wednesday is probably the biggest downward factor this week.

by David Peterson