Morning Gold: China Won't KowTow

Gold

Gold rallied Friday on back of China Yuan capital controls
Pieces in place for a short covering rally, with no catalyst in sight
China won't back down and gold does this morning

Summary

originally posted on opportunistictrader.com

Gold is lower this morning with spot down $7.00 as of this writing. The metals complex is lower across the board today after seeing some Friday short covering that bled into Sunday night. So why is it lower once again? The war of words and tariffs being waged between China and the US. The two countries have several tools in their toolboxes to use in policy. They are broadly stated Monetary policy, Fiscal policy, Capital Controls, and words. Here is a quick summary on the tools used during this trade war and how the Gold market reacts to their use.

Gold Weekly Spot- At least it isn't Copper

Trade War Tit- For-Tat Cheat Sheet

The US imposes trade tariffs on any good imported into the US by China. The market result:

industrial materials like Copper drop from lack of predicted demand in use to finish products that China sells to the US
precious metals drop because as everyone knows, PBOC is accumulating Gold as a transition asset of the USD. This is to satisfy the IMF in including the Yuan in its SDRs
Chinese equities drop because of potential earnings hit because that is what happens when your biggest customer stops buying

China Devalues the Yuan (monetary tool):

The Yuan weakens in USD terms: China, in an effort to partially offset price increases any US import tax (that is what a tarrif really is) creates, devalues or weakens its currency in USD terms. This makes Chinese goods cheaper to buy in USD terms.
Chinese Stocks Go Down: This also serves to lower earnings for chinese domestic companies as they must buy raw materials by converting Yuan to USD. This squeezes profit margins. This is how inflation works

So absent all other factors we are back to square 1. Prices for goods imported from China into the US are VIOLENTLY unchanged.China pays a price in lower stock valuations but they maintain their business cash flow. Remember, this all started while China was i nthemiddle of pushing for deleveraging corporate debt. This means that cash flow is very important, even if profits suffer. Chinese Corps have to keep making debt payments.

China Raises Margins on Yuan Trading ( Capital Controls)

China makes it more expensive to maintain short positions in Yuan forward contracts on Friday forcing shorts to either cough up more money or close their positions. Many close their positions.
Essentially, China is all about a weaker Yuan on an orderly basis. They are keeping a lid on offshore speculation which increases volatility and undermines Yuan stability. China must keep a lid on FX volatility if it is to keep moving forward in IMF status

China Introduces Tariffs on US Goods (Fiscal Policy)

China counters by stating they will put tariffs on $60bb of US goods imported into China

Trump Says playing hardball on trade is "my thing" (rhetoric)

Usually trump plays the bluster-and- backoff game. He is like afighter who throws a flurry of punches and backs up to see how his opponent reacts. Domestically, when the opponent fights back or is not fazed, Trump moves on. but when the opponent blinks, Trump presses.
Trump may be acting like a loose cannon to some, but we feel he is in a stronger position and can get away with it. China needs us short term more than we need them. And this also plays into the "Buy American" theme that is now creeping into markets.
In the end if the US wins a trade war with China, it will likely raise the price of goods domestically made to just under what the import cost of Chinese counter products. Not unlike how 1970s inflation played out. It also does encourage domestic manufacturing.

China Won't Kow Tow (Rhetoric)

China uses their state run blog to respond to Trump's comment by saying it will not back down.
The Yuan resumes its sell off, the Metals rally melts and we are where we were last Thursday
China can also lean on their populace to bear the brunt of policy errors, and without that pesky "democracy" thing

"China stores its wealth with its people", and may tap that wealth to avoid losing face to Trump

KowTowing... but to Whom?

CoT Report in Three Graphs

Gold Fund Shorts are Massive, and no one cares

The USD is nowhere vs the world FX market as more longs seek "safety"

h/t @zerohedge

And that is because it is all about the CNY as far as Gold is concerned:

CNY per USD weekly chart reflects "it takes more Yuan to buy a Dollar"

Trades on Our Radar

As stated in last night's Weekly Gold Report

Gold (Dec Futures)

Buying Strength Above $1229: We will be watching volume numbers near $1229 with an eye to buy for a 2-6 week hold. The risk would be new contract lows. This is not a vector trade. It is an RTM (regress to the mean) trade.

Selling Strength near $1229: this is the corollary to the first trade. If you are bullish above $1229, you are bearish below. Any signal to sell here would be a short term play and Vector System driven

Selling Weakness: We will not pick up pennies in front of possible steamrollers. Technically it is well within reason the market could plummet to the $1140 area. If we were inclined to sell weakness, it would be expressed in long Put spreads only.

Buying Weakness: any dip near the lows is a valid risk/reward play especially with funds near or at ATH short positions and commercials much less short than usual. Commercials are actually long in Platinum. That said, averaging down is not for us. We’d rather buy and get stopped out 5x on a tight stop a la Tudor Jones than add to losing positions.

Silver (Dec Futures)

Silver may be the best of all worlds in a reversal. Industrial qualities will move it in sympathy with Platinum and Copper. It also shares “moneyness” qualities with Gold. Equally important, while not as liquid as Gold, it is far more liquid than the other industrial metals. Silver is the metal of choice for us if a sector rally starts in the PGMs.

As believers in the motto “if you are bullish Gold, buy Silver” we will assess on the fly if something hits up

If a trade signal is triggered in Gold, we will look to Silver for confirmation and choose accordingly

Silver is an industrial metal, and although not a PGM it does switch allegiances back and forth between Gold and PGMs

If PGMs rise and Gold does lags, Silver will be the preferred choice of entry if it gives a system trade alert

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Good Luck VBL

Twitter: @VincentLanci

Opportunist Trader: Raising the Bar in Investment Services

About the Author:

Vince Lanci has 28+ years’ experience trading Commodity Derivatives. Through his Echobay entity, Mr. Lanci manages family assets and advises multi-billion dollar macro funds on Gold strategies. Over the years, his expertise and testimony have been requested in energy, precious metals, and derivative fraud cases. Lanci is known for his passion in identifying unfairness in market structure and uneven playing fields. He is a frequent contributor to Zerohedge and Marketslant on such topics. Vince contributes to Bloomberg and Reuters finance articles as well. He continues to lead the Soren K. Group of writers on Marketslant.