By Steve Saville
Assuming that useful price clues are what you want, it’s pointless to analyse the flow of gold into China and within China. I explained why HERE, HERE and HERE. I’ll write about the bogus ‘China gold demand’ theory again in the future as it’s one of the most persistent false beliefs within the bullish camp, but in this post I’m going to quickly deal with another China-related false belief that periodically shifts to the centre of the bullish stage: the idea that China’s government is preparing to back the Yuan with gold.
I was going to write in detail about why a gold-backed Yuan is a pipe dream, but then I discovered Geoffrey Pike’s article on the same topic and realised that doing so would be akin to reinventing the wheel. This is because the aforelinked article encapsulates the argument I would have attempted to make. You should click on the link and read the entire piece (it isn’t long), but here’s the conclusion:
“There is no way that the Chinese central planners are going to voluntarily give up an enormous amount of power by going to some form of a gold standard. It would drastically reduce their ability to spend money. It would reduce their power. It would limit their ability (or lack of) to centrally plan the economy.”
Given that there are good reasons to expect gold to resume its long-term bull market in the not-too-distant future, why do so many bullish gold analysts argue their cases using the equivalent of fairy stories?
The China short (via the leveraged YANG) is now covered (ref. May 5 post) not because I think it is not going to go up more, but because I am a chicken. I have never claimed to be anything other than a cash valuing risk manager. The heroic shorting is for others until I can get new longer-term trends. China’s trend, along with the US and others, is still up. Not talking about secular trends, but rather intermediate ones, defined here as multi-month.
In reviewing the chart of FXI, I see something similar to the European Euro hedged ETF and several other items (incl. a favored Japanese machine tool and robotics manufacturer that NFTRH subscribers know about) that may make good cases for re-buying, not shorting, eventually. There is some of this going on in US stocks as well. Think healthcare/biotech.
I don’t think the corrections are over with, but I am not ready to become a bear because I don’t see an intermediate term reason to yet. So it’s swing trading and cash defaulting for this chicken until trends change.
Back on the China 25 ETF above, it is not over sold yet but down the road, pending the view on the broad global markets, I am watching the area from which we charted the breakout in NFTRH. That would be around 42-44.
In NFTRH, using the China 25 fund FXI and the FXT index, we successfully gauged the coming of the breakout and then attained upside targets. I personally did not take advantage of it but know some subscribers who did.
What I did do, as noted in NFTRH 341, is to take the ridiculous action of leverage shorting China via YANG. That is due to the ETF/index having gotten to target in an over bought condition and starting to hesitate.
Yesterday was not very pleasant for this position. Today is better, as YANG is working its leverage to an 8% gain. This will be a quick trade in all likelihood.
I don’t know how literal this is, but by way of SoberLook’s excellent daily email service of macro signposts, here is a look at a street vendor quick-teaching kids how to read trend lines and trade like Buffett. I don’t think Buffett uses trend lines but I do think this is a shoe shine boy moment for the Chinese stock market, to one degree or another.
“If the second largest economy in the world, right, says ‘we’re going to inject as much liquidity as we have since the financial crisis’, that is a big deal. So I think that is a message that PBOC’s sending that says like risk assets; grow your appetite for risk assets.”
This reminds me of last October when super Fed Hawk James Bullard puked out talk of QE 4 the minute US markets showed something impulsive to the downside. Turned out (as we noted at the time) that the Semiconductor element of that mini panic was entirely hype and the Dove in drag went away to gather himself, most recently coming back to the mic with his sharp beak and talons and that glaring look in his eyes.
Ha ha ha… now China panics in an effort to soft peddle the rational policy it enacted of allowing shorting of its ‘free’ markets. We called the ‘China allows shorting’ news non-fundamental hype on Friday and we call the ‘China eases’ news today hype as well. Though its implications could be felt well beyond a hype burst, if players are indeed compelled to “like risk assets” and to grow their “appetite for risk assets.”
The bottom line is that we are on a long journey toward losing confidence in these policy moles. Here in the US a cranky and sometimes malcontented website has dubbed the phase Peak Fed ©.
Bulls and bears are getting ground up during the process, which will either resolve up (manic acceleration) or down (cyclical trend change). But it is a process and by definition a process is “a natural or involuntary series of changes”. Believe it or not, the process is natural. In this case it is addressing unnatural things.
By Alhambra Investment Partners
China remains an export economy no matter how hard they try to convince the world they are moving otherwise. The idea of creating internal “demand” as a means to extricate marginal changes from everybody else is undoubtedly a good idea, even a noble one, but the reality of China as it exists top-down isn’t conducive for such a transformation. Further, that just isn’t realistic under the global conditions that have persisted since the Great Recession was declared over.
In that respect, there isn’t much to separate what is occurring now from the Great Recession itself. Certainly there exist positive numbers in economic accounts where deeply negative numbers predominated during the “event”, but the major factors that inaugurated the dislocation remain especially unsolved and more often than not misunderstood. China’s predicament falls into that category.
Continue reading Reality on China, Finally
By Steve Saville
Total guesswork regarding China’s gold holdings
Last year I noticed an article by Alasdair Macleod containing an estimate that China (meaning: China’s government) had accumulated 25,000 tonnes of gold between 1983 and 2002. I would say that this estimate was based on rank speculation, but that would be doing an injustice to rank speculation. It is more like total guesswork. It is largely based on assumptions that are either obviously wrong or that have no supporting evidence. I bring this up now because it looks like the 25,000-tonne figure that was plucked out of the air by Mr. Macleod last year is on its way to becoming an accepted fact in some quarters. For example, it forms the basis of a new estimate that China’s government now has 30,000 tonnes of gold.
Continue reading China’s Gold Holdings
By Alhambra Investment Partners
China Steering Away From or Back Toward Bubbles?
The confusing nature of the PBOC’s actions in the past year or so has led now to publications of theories over a potential power struggle at the central bank. While finally acknowledging that last year was all about “targeted” approaches to monetary “guiding” economic reality, this year is about to explode in personnel changes and therefore, supposedly, a reactionary course to more familiar “flooding” of broad-based approaches. Curiously, unlike last year, there is no contention about the state of China’s economy as it is now-universally accepted as foundering badly.
The last two “rate cuts”, including the one just conducted this weekend, are being listed under that paradigm, though I don’t know how there is any way to reconcile them without including currency moves. The PBOC may have reduced its benchmark rates, but has simultaneously also moved to a higher fix on the currency. The latter is far more important and is perfectly within the “reform” paradigm as such a move is most likely (nobody will ever know for sure) aimed at speculative “dollar” financing of all China’s problems – bubbles.
Continue reading China Steering Back Toward Bubbles?
Rummaging for financial news and analysis from around the Web…
- Gold-CCI & GDX and Gold CoT Improving, But… –NFTRH [biiwii comment: hey look, a fledgling rally appears to be getting started, but with PDAC next week the gold bug dream machine could get a bump up again and the sailing beyond the near-term is not yet indicated to be ‘all clear’]
- Healthcare/Biotech Names Still Dominating –B.I.G. [biiwii comment: don’t I know it… did some profit taking last week but also a little replanting within the Bio’s. The weekly BTK chart has been bullish and until that changes, it’s on a trend]
- Periphery Fragility List –Credit Bubble Bulletin [biiwii comment: i just found doug noland again, so CBB will be back either in ‘around the web’ format or directly published]