The carnage on the trading floors of the world's stock markets continues today, as two big threats to the global economy in Asia make headlines this morning. North Korea announced the successful detonation of a Hydrogen Bomb, also known as a thermonuclear warhead. The markets were more frightened over a surprisingly weak yuan fix by China, which saw the currency fall to a five year low.
Gold is jumping for the third day in a row, solidly above the $1,088 resistance level. Spot gold hit an early morning high of $1,094 an ounce before starting to consolidate at the $1.090 mark.
Recent Gold Action
Safe haven demand triggered some short covering in gold this morning. Spot gold is up over $13 in early trading, after hitting a high of $1.094. This is far above the $1,086 level that some traders see as pivot point on the " reverse head and shoulders pattern". If gold confirms this pattern, traders expect to see prices rise through the $1,100 mark.
Spot gold closed up $3.10 yesterday, to $1,077.50 an ounce. The intraday high was $1,083. with the low at $1,074.70. COMEX gold closed at a two-week high, even though the dollar hit a one-month high before easing. This is the third day in a row that the February contract has closed higher, and its fifth gain in seven days. If gold can close decisively over $1,086, it will be a bullish breakout of the recent $1,050 - $1,085 channel. If so, the next solid barrier is $1,100.
Today's resistance levels are at $1,088 (which gold is testing at press time,) then $1,098. First support is at $1,074, then $1,069.
Yuan and H-Bombs
While the Saudi - Iran confrontations couldn't lift gold, Kim Jong Un managed to put some fear in the marketplace. North Korea announced that it successfully exploded a thermonuclear device (H-bomb) at 10am local time, triggering a magnitude 5.1 earthquake. Monitors in South Korea and Japan quickly moved to note that this earth-shattering kaboom was too small to be an H-bomb.
If the North Koreans have managed to produce an H-bomb, it would be a tremendous advance in their nuclear technology. A thermonuclear device actually uses a "regular" atomic bomb as a detonator.
The crazy thing about the markets today is that they are more panicked by a shift in currency policy in China than they are about a nuclear confrontation on the Korean peninsula. The Chinese government set the starting band for the yuan at a four-year low, after a report that wholesale prices in the service sector fell to a 17-month low. Spooked traders took the yuan even lower, hitting the worst level in five years. Fears are that China is on the cusp of another rapid devaluation of the yuan to rescue a foundering economy.
Good US Data Not Enough For Stocks
The ADP private sector payrolls report showed a much better than expected 257,000 new jobs were added in December. This was the largest gains in a year, but stocks barely seemed to notice. The US trade deficit shrank by 5% to $42.4 billion. Analysts were expecting an expansion. There's bad news hiding under that good news, though. The only reason the deficit shrank was due to companies working down record surplus inventories, instead of importing more. Exports were also down (but not as much as imports were,) as the stronger dollar suppressed foreign demand for US goods and services.
Collapsing Oil Prices Stoke Deflation Fears
In ordinary times, the threat of possible armed conflict between Saudi Arabia and Iran, the two most powerful nations in the Middle East, would send oil prices soaring. However, these are far from ordinary times for the petroleum industry. The global crude oil glut means that the world's crude supply has perhaps the most slack in history. Even with the Energy Information Agency reporting today that US oil stockpiles dropped by 5.1 million barrels, Both West Texas Intermediate and Brent crude are hitting 11-year lows of under $35 a barrel.
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