Gold turns lower after China shows trade slowdown

In the Lead: “400. This is NOT Sparta!”

The trade metrics released today by China revealed a notable deceleration in trade growth. The country’s exports to Europe contracted sharply as fading demand for goods became manifest recently. It is worth noting that China’s imports also declined even in the face of an appreciating yuan. It is thought that the general trend at work here is in part the result of concerted efforts on the part of China’s leadership to avert the deleterious outcomes of popping various bubbles that have infested its economy and markets.

Now (as in next week) comes the crucial indicator to parse: Did loan growth also undergo a contraction, or is money still being handed out hand-over-you-know-what to anyone who can fog up a mirror? That, as well as China’s inflation numbers for September, will be the focus for China watchers come next week. Despite an “at the ready” Fed indicator that was gleaned in the FOMC meeting minutes, the precious metals complex showed signs yesterday afternoon that the morning’s lift turned a tad less energetic after it dawned on buyers that one Slovak vote does not make for the resolution of the European crisis or of the problems the region’s banks continue to face.

Yesterday’s EC outline of a comprehensive plan aimed at fixing Europe’s banks was quickly shelved by those who showed optimism about it, when this morning’s Credit Suisse-issued analysis revealed that no fewer than 66 of the region’s financial institutions would not receive a passing grade in the event of a fresh stress test. Only eight out of 90 tested banks failed to make the grade in July, when the test involved a critical line of 5% core Tier 1 capital ratio. The latest computation uses a 9% core Tier 1 capital ratio. Among those needing the most capital in such an event would be Royal Bank of Scotland, BNP Paribas, Barclays Plc and Societe Generale.

As a result of the aforementioned China data and eurozone turmoil, the overnight action in precious metals turned towards moderate selling despite some decent regional physical offtake coming from Asia. This morning’s opening was really not much different; spot gold lost $7.10 to start the day off at the $1,667.00 bid level. In the background, the US dollar firmed a bit and remained well above the 77 level on the trade-weighted index. The greenback clawed back in the wake of the European banking-related news and speculators were once again showing that all might not be well in that system while also indicating that they are not quite as glum about the prospects for the American economy.

Crude oil slipped fairly hard, losing $1.50 and falling under the $84.10 mark per barrel. The Fed minutes also showed a US central bank that is less than sure that the US economy is fully on the mend. Meanwhile, the country’s trade deficits remained steady at $45.6 billion in August, albeit the gap with China came in at a fresh record ($29 billion).

Speaking of the Fed, its members now appear to be closer to setting certain targets for how to react policy-wise based on the reading of certain “milepost” signals coming from the US economy. Instead of knee-jerk easing whenever one or another bad reading comes from a particular sector, (or when markets throw “gimme more” tantrums) the Fed will be parsing inflation, inflation expectations and US employment levels and might well incorporate the Taylor Rule into its future decisions. Of course, some were quick to jump to the conclusion that such revamping in Fed policy-making processes invariably points to a sure-to-come QE3 as soon as Q1 of 2012.

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