Gold price signals China credit bubble bursting as investors seek safety

Uncertainty is growing over China’s ability to sustain the rapid rates of economic growth it has seen over the past decade

Uncertainty is growing over China’s ability to sustain the rapid rates of economic growth it has seen over the past decade Photo: Getty Images

By Andrew Critchlow

8:00PM GMT 16 Feb 2014

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China’s “unfolding credit crunch” is having an unforeseen and dramatic impact on gold prices as investors urgently stock up on the precious metal as a form of financial protection against a sharp correction in the world’s second largest economy.

This is the main reason why gold prices have unexpectedly shot up more than 10pc to breach $1,300 (£776) an ounce for the first time since November against the prevailing forecasts for weaker demand made by many industry experts at the beginning of the year, according to Adrian Ash, head of research at gold trading platform BullionVault.com.

Gold traded on the Shanghai Gold Exchange has also reached a three-month high.

Rebounding is part of the reason for the rise, said Ash, adding: “Gold lost 30pc and silver nearly 40pc last year. The world economy will struggle to deliver all the good news priced in by that crash. But China’s unfolding credit-crunch looks central right now.”

Uncertainty is growing over China’s ability to sustain the rapid rates of economic growth it has seen over the past decade amid concern over high-levels of debt among its provincial governments. These concerns have helped to drive sharp falls across emerging markets since the beginning of the year.

Ash argues that capital flight is happening at a rapid rate in China because of the $1.8 trillion of funds that have flooded into unregulated, non-bank “wealth management products” which offered very high yields, up to 17 times as much as cash deposits. It is feared that many of these funds are now trading at a loss, setting up a crunch moment for China’s economy.

“Bullion traders never knew before what would happen to prices if China hit trouble,” said Ash, “because we’ve never before seen Chinese demand plumbed into the world market so deeply. Its jewellery buyers, together with rising mining costs worldwide, helped finally put a floor under gold in 2013. But while that kind of consumer demand will never drive prices higher, capital flight by wealthier households and Chinese money managers certainly can.”

According to Ash, the first default which could be a sign of China’s credit bubble bursting was reported two weeks ago when a $50m coal-mining bond failed to repay investors on maturity. He says that about $875bn of other such products are due to mature in 2014 and that Beijing has few answers available to tackle the problem.

“Gold’s 2014 rally had been steady before, far quieter than the rebound from last spring’s record crash,” he said. “But rising for seven of the past eight weeks, something it hasn’t managed in two years, gold has now risen for six trading days running. That’s a very rare move, last seen when gold neared its peak above $1900 during the euro crisis, US debt downgrade and UK riots of August 2011.”

Meanwhile, uncertainty continues to surround a 500-tonne discrepancy in China’s gold import figures and its domestic supply. The unaccounted-for Chinese gold has helped to fuel market speculation that the People’s Bank of China may be stockpiling, or that bigger volumes are changing hands on the grey market as a hedge against financial turmoil.

However, other brokers have said that the rise in gold prices last week above the commodity’s 200-day moving average was mainly because of the fall in the dollar against a basket of other currencies. Commerzbank said that SPDR Gold Trust, the world’s largest gold exchange-traded fund, raised its holdings above 800 tonnes of the precious metal for the first time.

According to Gold Money, bulls also returned to the market after Janet Yellen signalled that the US Federal Reserve will continue to prune back its stimulus measures. “Western buyers and vaults are now back in the frame amid the more bullish market sentiment,” said Roland Khounlivong, head of dealing for the broker.

http://www.telegraph.co.uk/finance/commodities/10642184/Gold-price-signals-China-credit-bubble-bursting-as-investors-seek-safety.html

The insatiable rush for the barbarous relic

When there’s much wrong with the world, it must be the fault of either greedy speculators or that ‘barbarous relic’ called gold

The attempts of profligate governments to escape the strict discipline imposed by gold have often led to crises, which in turn have been used as excuses for further government intervention.

With the price of an ounce of gold rising from a low of about $250 to break past $1,900 in August 2011, the year 2001 marked the beginning of an exciting 10-year bull run for the metal. The massive jump in price led to tectonic changes in the international gold market. China’s huge, but until then dormant, gold mining industry was reinvigorated as both large mining corporations and amateur gold diggers stepped up efforts to mine gold to satisfy increasing demand. Huge demand from the Chinese central bank added further to the rush for gold. Mines in other parts of the world, which were gradually shut during the course of a previous 20-year secular bear market, were reopened for production.

Such clamour for gold was hardly a new tale though. Similar events played out in the 1970s when the price of gold shot up with the end of price manipulation under the Bretton Woods monetary system, giving a push to explorers and miners to pursue untapped gold mines.

Gold: The Race for the World’s Most Seductive Metal by Matthew Hart provides an engaging account of the dynamics of gold price through history, and its stimulatory effect on gold production—not to miss interesting tales of individual explorers and businessmen. But the more intriguing part of gold’s history, that has spanned over more than just a few centuries, has been the metal’s brush with the political class; which forms the other half of Hart’s narrative on gold.

For a metal that has been the market’s preferred medium of exchange, gold has never quite caught the favour of politicians. This should not be perplexing. For one, in the economic era prior to the 20th century a monetary system based on gold tied the hands of profligate governments trying to live beyond their means. Second, adjusting for the vagaries of short-term price fluctuations, the rising value of gold has constantly exposed the depreciating value of paper currencies; then, it is not without a reason that gold remains a major hedge against risk even today.

The attempts of profligate governments to escape the strict discipline imposed by gold have often led to crises, which in turn have been used as excuses for further government intervention.

Evidence of the same is documented by Hart through his account of important events in financial history, such as US banker John Pierpont Morgan bailing out the US government in 1895, US president Franklin D. Roosevelt confiscating Americans’ gold in 1933, and Richard Nixon reneging on his commitment to the rest of the world to redeem dollars for gold in 1971.

What is often ignored is, each of these crises followed attempts by the US government to live beyond its means by inflating the country’s monetary base well beyond the available stock of gold. Naturally, this led to a series of panic attacks that exposed the government’s insolvency. But for Hart, who acknowledges economist Barry Eichengreen for his “valuable observations” on the book’s manuscript, these do not count for fraud on part of governments, but for gold’s incompatibility with the demands of a modern economy.

To be fair to Hart, the view is shared by many economists who consider economic discipline a hindrance to macroeconomic policymaking.

Hart’s problems with gold extend further. To him, the huge demand for a metal like gold, that has little use value, should probably be irrational. The craze for gold that has led to troubles of nepotism in China, and price manipulation by London’s bankers is a major headache for the world. Not to forget, encouraging retail investment in gold has only added to price instability and risk. And finally, since there’s much wrong with the world, it must be the fault of either greedy speculators or that “barbarous relic” called gold.

Prashanth Perumal is Assistant Editor (Views) at Mint.

http://www.livemint.com/Opinion/junoj6E3srVuLJk67HTgNO/The-insatiable-rush-for-the-barbarous-relic.html

Gold Buying Opportunity Now, Could Go $1500 By Summer

We have been writing about the bottoming process of the Gold Bear Cycle (Elliott Wave Theory) since December 4^th 2013, and our most recent article on December 26^th reiterated that the best time to accumulate the Gold/Silver stocks was in the December and January window. Specifically this is what we wrote:

“These types of indicators are coming to a pivot point where Gold is testing the summer 1181 lows…at the same time, we see bottoming 5th wave patterns combining with public sentiment, bullish percent indexes, and 5 year lows in Gold stocks. This is how bottom in Bear cycles form and you are witnessing the makings of a huge bottom between now and early February 2014 if we are right.

The time to buy Gold and Gold stocks is now during the next 4-5 weeks just as we were recommending stocks in late February 2009 with public articles that nobody paid attention to. This is the time to start accumulating quality gold miner and also the precious metals themselves as the bear cycle winds down and the spring comes back to Gold and Silver in 2014.”

Since that article a few of our favorite stocks rallied 40-50% in just 3 weeks or so from the December timeframe of our article. A recent pullback is pretty normal as we set up for Gold to take out the 1271 spot pricing area and run to the mid 1300’s over the next several weeks. By that time, you will be kicking yourself for not being long either the metals themselves or the higher beta stock plays.

A few suggestions that we have already written about we will reiterate here again. Aggressive investors can look at UGLD ETF, which is a 3x long Gold product that will give you upside leverage as Gold moves into elliott wave3 up. Other more aggressive plays we already recommend a lot lower include GLDX, JNUG, NUGT and others. Picking individual stocks can be even better and we have recommended a few to our subscribers that are already doing very well.

What will trigger this next rally up is sentiment shifts to favor Gold and Silver over currency alternatives. The precious metals move on sentiment, much more so than interest rates or GDP reports or anything else in our opinion. Sentiment remains neutral to bearish as evidenced by the larger brokerage houses running around in January telling everyone to sell Gold, so we see that as a buy signal on top of our other indicators.

 

We expect the mid 1500’s by sometime this summer, but by then your opportunity will be long in the rear view mirror.

http://www.investing.com/analysis/gold-buying-opportunity-now,-could-go-$1500-by-summer-200771