Gold prices poised for a MONSTER rebound soon?

For centuries, gold has been recognized as one of the best ways to preserve one’s wealth and maintaining its purchasing power. Even in ancient times during the rule of the Egyptians and Greeks, gold served its purpose not only for its beauty but also for the function of being a means of exchange and also for its power to change one’s life. But as with anything that has any value attached to it, there will always be ups and downs in its price discovery mechanism.

The Gold market has been relatively stable since it retraced from its recent high in August of $1927 and a low of $1529 on September 16th. Volatility of the VIX indicator has somewhat stabilized. In our previous article, we recommended a sell order in August after a mini parabolic run in the Gold price. So where to now?

In view of both political and economic developments throughout the world, we have come to the conclusion that it is about time to be bullish on Gold again. There are both fundamental and technical reasons to be bullish on Gold at this moment in time.

Fundamentally, there are various reasons why Gold price is about to head north soon.

FIRST, the demand for Gold in Asia will soon take off for the reasons that it is approaching end of year festivities for various communities. As for the Indians, the festival of lights or ‘Deepavali’ , is going to fall on the 26th October. Traditionally, during such festivals the Indian communities will buy gold jewelry either for themselves or as a gift for their relatives and hence the demand for gold will soar. According to Srivanesan, an official from the Indian Gold Dealer Association, the demand for Gold during such festive seasons, normally ‘will increase by more than 30%’.

Come November and December, it will be the wedding season in Asia. The Muslim communities in South East Asia will normally hold their weddings during the school holidays and it could not be better timing, coinciding with the year-end long school holidays. Unlike the Chinese and Indians who choose their wedding dates using Feng Shui and Vaastu Sastra (Indian version of Feng Shui), the Muslim communities tends to have their weddings during holidays because it is the time where everyone is free and relatives are able to give a helping hand.

On top of that, the coming of the Lunar Chinese New Year also provides another reason for the increased demand for gold. Traditionally, Chinese families will buy gold either for themselves or as a gift to their loved ones during the festive season. Goldsmiths will also churn out special editions or collectibles according to the zodiac sign of that particular year. Moreover, the month of December and January are also considered as auspicious months for getting married for the Chinese and hence the demand for Gold.

SECOND, making gold an investment is now considered trendy among the younger generations. Gold again is the choice for jewelry instead of diamonds and precious stones like rubies, emeralds and etc due to the value that is attached to gold. Moreover due to persistent marketing and educating efforts by the governments in Asia, investment in physical gold through the gold bullion coins have increased by multiple folds. A check on several banks here in Malaysia showed that the Kijang Gold coin is unavailable due to excessive demand.

Across the South China Sea, China has installed its first Gold Vending machine on the 1st week of October, to join other countries such as USA, Germany, Italy and the United Arab Emirates in hosting an ATM machine that dispenses Gold coins and bullion. The public can now purchase certified gold coins with credit cards and cash through such machines. The Chinese government is keen to promote the sales of gold in the country and its effort has seen an increase in demand for gold by 27% last year. In order to accommodate the increased demand for gold, the Chinese government plans to install 2,000 more ATM gold vending machines throughout China by next year.

A report by the World Gold Council in May this year showed that China has overtaken India as the world’s largest gold consumer, consuming about 91 tons which translates to about an increase of about 21% year on year.

THIRD, the ratio of Gold to Foreign exchange in Asian countries is very low compared to Western countries. If you look at the World Gold Council’s Dec, 2010 chart for Gold/Forex reserves, the biggest holder of gold/forex are the Eurozone countries and US.

Country Gold/Forex Tonnes

Portugal 81.1 % 421

Greece 78.1 % 111

USA 74.7 % 8133

Germany 71.7 % 3401

Italy 71.4 % 2451

France 66.1 % 2435

India 8.1 % 614

Japan 3.0 % 765

China 1.7 % 1054

Malaysia 1.5 % 36

South Korea 0.2 % 14

You would also notice that Asian countries are having the lowest Gold/Forex ratio even though China, India and Japan have one of the largest tonnage of gold in its reserves. What does it tells us? It simply tells us that Central Banks in Asia are about to go for a spending spree in gold buying in order to increase its ratio of Gold/Forex.

With China’s forex reserves standing at $3.2 trillion, Japan’s $1.1 trillion and India’s $311 billion, there will be a lot of gold buying among themselves in the coming months and years. When Central Banks starts ramping up their purchase of gold, it might create a panic buying in gold and thus will push up its price ‘fast and furious’. Gold price discovery can happen in days unlike in housing where it may take months and years.

The figures supplied by the WGC might not reflect the true holdings of Gold by the Central Banks of the world. China might be holding much more than the reported 1053 tons because there have been a significant drop in Gold exports from China in recent years.

For all you know, Central Banks may have been the ones who were controlling the gold trade all this while. They have been manipulating the gold market through tactics like ‘Pump and Dump’ and also controlling the gold price through exchanges like SGE and CME by increasing the margins. When the price collapse, they will be quietly collecting gold to replenish their vaults like what is happening now. As for the Western countries like USA and Europe, if the ‘Empty Vault’ theory holds true then they might be holding much less gold than reported, and heck, all hell will then break loose in gold prices.

FOURTH, Gold prices will always be supported as long as debts are monetized and inflation remains high. According to the GAO, so far the FED has provided more than $16 trillion of bailout money to banks. It is universally known that you can’t fight debt with more debts and by printing more money to bailout ‘too big to fail’ banks will only result in further inflation of the prices of goods and services.

With the rate of inflation running at 9% in India and 6% in China, and food inflation running at more than 10%, there are no reasons why the price of gold should go down any further. This is because gold will always be a hedge against inflation and the demand will always be there during bad times.

FIFTH, it’s the China factor. China has been quietly accumulating gold for the past few years. According to Wikileaks :

"China increases its gold reserves in order to kill two birds with one stone"

"The China Radio International sponsored newspaper World News Journal (Shijie Xinwenbao)(04/28): "According to China's National Foreign Exchanges Administration China 's gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB."

So, no doubt there will be continuous demand for gold from the Chinese Authorities in the coming months and years and hence provide a support for gold price.

SIXTH, another group of investors that we have overlooked is the funds industry. The funds industry controls most of the wealth around the world, be it hedge funds, sovereign wealth, insurance companies, mutual funds, pension funds and etc. It is estimated that they control about $31 trillion worth of assets which is more than double the GDP of U.S which is about $14 trillion. It is estimated that the funds industry hold less than 0.15% of their assets in gold which translates to about $46.5 billion.

What will happen when the fund industry realizes that they are currently underinvested in gold? Especially, if the ongoing financial crisis in Europe takes a turn for the worse, and creditors liquidate Treasuries en masse, and if bonds and stocks provide lower than expected returns and etc. What if these fund managers decided to increase their exposure to gold say by another 0.15%? This will represent another $46.5 billion of fresh funds available for new buying. Just imagine what impact it will have on the price of gold? I am sure in a year or two, we will be saying that gold at $2000 is cheap.

LASTLY, from a technical perspective Gold since retraced from August has been in a sideway consolidation for the past month and the market seems to be having a strong support at 1600. It is now stabilizing around the 1600-1650 level and with the tightening of the Bollinger bands, it seems like it is about to breakout from it.

Malaysia Chronicle

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VIEWS from ALPHA CHART - FBM KLCI...Finally, Clarity Is Clear!

It's been awhile since I last talked about market clarity I longed for; the good news is it has finally arrived, but unfortunately the news itself is bad!

Taking cue from the technical readings of the market, the signals flashed actually point to...more market weakness over the medium to long term, amidst an on-going technical rebound now.

This concludes that the current technical rebound represents a mere dead cat bounce...any precipitating end to this strength should be taken as opportunity to ditch stocks by maintaining a position where one is comfortable holding onto, even in the event of heavy correction or crash (this however is definitely not my style of trading as readers can comprehend from the 100% cash position I have right now; nonetheless, this is far too common a practice for many investors in general). 

The price to pay for making the mistake of greed is way outweighing the blunder of fear in my opinion. The last check of my estimated investor sentiment cycle was dated 7 Feb 2011... 

I'm convinced still with my projection then, the fast-forwarded cycle now will look like this, ~6 months after...

Investors will learn that at times a dull "investment" like cash in FDs can be one of the best strategies...performing just the basic but least appreciated act of preserving capital.

Honestly, the floodgate for a bear market is wide open now, only if the bear capitalises on it and takes full advantage..

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World Must Cut Deficits, Not Rely on China: Wen

Chinese Premier Wen Jiabao, facing calls to widen support for indebted European countries, signaled that developed nations should cut deficits and open markets rather than rely on China to bail out the world economy.

“Countries must first put their own houses in order,” Wen said today at the World Economic Forum in the Chinese city of Dalian. “Developed countries must take responsible fiscal and monetary policies. What is most important now is to prevent the further spread of the sovereign debt crisis in Europe.”

China can best contribute to the global economic recovery by ensuring steady growth at home, Wen said, calling on the European Union and U.S. to allow more Chinese investment in return. Stocks dropped in Asia as the comments damped optimism that China would help stabilize the euro region, after Italy this month followed Spain, Portugal and Greece in seeking investment from the world’s fastest-growing major economy.

“What he is basically saying is China wants to help, they want to invest, but we can’t help you take the proper measures to control the debt crisis, you’ve got to do that on your own,” said William Rhodes, a senior adviser to Citigroup Inc. who was at Wen’s speech.

The MSCI Asia Pacific Index gave up its early gain of as much as 0.3 percent to trade 1.8 percent lower at 5:19 p.m. in Hong Kong. Crude oil inNew York was 1.2 percent down at $89.17 a barrel. Losses were capped after Chinese business magazine Caijing reported that China is still willing to buy bonds of crisis-hit nations, citing Zhang Xiaoqiang, a vice chairman of the National Development and Reform Commission.

‘Doomsday’ Scenario

Greek Prime Minister George Papandreou will hold a conference call with German Chancellor Angela Merkel and French President Nicolas Sarkozy today amid increasing speculation that Greece will default. Spain is scheduled to sell debt tomorrow, after demand fell at an auction by Italy yesterday.

A default by Greece would be a “doomsday” scenario, Rhee Chang Yong, chief economist of the Asian Development Bank, said in Hong Kong today. “That’s the responsibility of the European and advanced economies’ policy makers not to let this happen, because if this happens, there would be huge turmoil in the global financial market.”

U.S. Treasury Secretary Timothy F. Geithner will press EU finance ministers to do more to combat the crisis when he meets with them this week, a euro-area official said. The official spoke on condition of anonymity because preparations for the meeting in Wroclaw, Poland, on Sept. 16 and 17 are confidential. It will be the first time Geithner has attended a session of Europe’s Economic and Financial Affairs Council, or Ecofin.

Sustainable Growth

The European crisis was “very, very damaging in the American economy last summer,” Geithner told Bloomberg Television on Sept. 9. “It’s very important to the world that Europeans do what they need to do so that the problems they’re facing don’t spread.”

Wen said he was confident that China would achieve “longer term, better quality” economic expansion, and that this would be the country’s contribution to sustainable global growth. The Chinese government would adopt policies to avoid volatility in its economy, he said.

In return, Wen called on the U.S. to maintain fiscal and financial stability and “ensure the interests of global investors.” China’s $3.2 trillion of foreign-exchange reserves make it the biggest holder of U.S. Treasuries.

The U.S. needs to lift export restrictions and, together with the EU, open markets to investment by Chinese companies, Wen said.

Quid Pro Quo

“We have on many occasions expressed our readiness to extend a helping hand, and our readiness to increase our investment in Europe,” Wen said. At the same time, “they should recognize China’s full market economy status” before the 2016 deadline set by the World Trade Organization. “To show one’s sincerity on this issue a few years ahead of that time is the way a friend treats another friend,” he said.

Market economy status would help Chinese exporters defend themselves in investigations that they are selling goods at below cost in the EU. As part of its accession agreement to join the WTO in December 2001, China agreed to be recognized as a non-market economy for 15 years in anti-dumping probes.

“China knows ‘we’re in this together,’ and it will benefit by helping its two biggest export markets,” said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. who has worked for the International Monetary Fund and European Central Bank. China’s leaders are taking “into account the nation’s own development strategy, such as recognition of market status, which is very important for Chinese business.”

‘Last Resort’

The Chinese government shouldn’t buy bonds issued by individual euro-area countries because their leaders and the European Central Bank are in disarray, Yu Yongding, a former adviser to China’s central bank, said in e-mailed comments today.

The nation is not a lender of last resort for “troubled countries,” said Yu. “China has to wait until it can see a clearer road map by euro countries for solving sovereign-debt problems,” he said today.

Finance ministers from Brazil, Russia, India, China and South Africa will meet on Sept. 22 to discuss the European debt crisis and make a decision on whether they will help, R. Gopalan, secretary in the Department of Economic Affairs in India’s finance ministry, said in New Delhitoday.

‘Not Poor’

The European “countries are not poor,” said Rhodes, author of “Banker to the World: Leadership Lessons from the Front Lines of Global Finance.” “They have got to get their act together, just like we have to in the United States.”

Italian officials held talks in the past few weeks with Chinese counterparts about potential investments in the country, an Italian government official said Sept. 12, adding that bonds weren’t the focus.

“A few months ago, China said it would buy Eurozone debt but then they bought really little of it at auctions,” said Jan Lambregts, global head of financial market research at Rabobank International in London. “They haven’t really been putting their money where their mouth is.”

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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China To Become New Economic Powerhouse in 2016?

China overtook Germany to become the world’s third largest economy in 2007 and three years later reached another milestone by overtaking Japan as the second largest economy in the world. Since then China was predicted to overtake the US as the world’s largest economy powerhouse around 2025 or 2030 the latest. Judging from how the China’s economy is growing there’s no doubt that it’s a matter of time before the country would achieve such an awesome milestone.

But if the latest data posted on World Economy Outlook by International Monetary Fund (IMF) is reliable, the date of China becoming the new economic leader could be sooner than that – 2016. According to the figures, the Chinese economy would grow from $11.2 trillion in 2011 to $19 trillion in 2016. Over the same period, the U.S. economy will rise but at a slower pace from a dominant $15.2 trillion (2011) to a mere $18.8 trillion (2016). Hence China is set to be officially announced as the world’s dominant economic power starting the year 2016.

There would surely be continuous debates when that year arrives, if indeed the above prediction is correct. Analysts may argue that economic power should be measured by purchasing power parity (PPP) which means what your money can buy on the street. It should be measured by converting the national currency (in this case Chinese yuan or renminbi) into the U.S. dollar and measuring how much is flowing through the economy, the same way “Big Mac” index was used.

Interestingly IMF also projects U.S. GDP (in dollars, of course) will be $15.2 trillion in 2011 rising to $18.8 trillion in 2016; while China’s will be $6.5 trillion this year and almost doubled to $11.2 trillion by 2016. Under such yardstick U.S. will still be the largest economic powerhouse by 2016 (*phew*). In addition, if analysts were to measure per capita income as a proportion of GDP, the U.S. will still leads ahead of China. Even at IMF’s preferable measurement of GDP market rates, U.S., which is 130% bigger than China now will still be 70% larger by 2016.

IMF considers that GDP in purchase-power-parity (PPP) terms is not the most appropriate measure for comparing the relative size of countries to the global economy simply because PPP price levels are influenced by non-traded services, which are more relevant domestically than globally. But analysts argue that PPP is the closest you can get because it measures the output of economies in terms of real goods and services.

China has been the fastest growing economy in the world for almost three decades and in the process consumes more than a third of the world’s aluminum output, a quarter of its copper production, a tenth of its oil and accounts for more than half of the trading in iron ore. On another note, China is also the largest producer of food and agricultural products, seafood, cotton commodities, pork, textile and electronic products.

Nevertheless one has to remember that China still has a secret weapon – the deeply undervalued renminbi. Revalue the renminbi could shift the GDP figures drastically. Still, beyond 2012 the next U.S. President may not be so gentle with China, if President Obama were to lose the election to some crazy guys such as Donald Trump. Speculated to challenge Obama, Trump blasted Obama’s China policy in allowing China to succeed and prosper because apparently China is going to destroy America in the process.

What was in silly Donald Trump’s mind? Does he plans to invade China if the country continues to grow and overtakes U.S. while maintaining an artificial undervalue renminbi? Trump should be made to realize that China still has an estimated US$3 trillion in U.S. treasuries which it could dump it in the open market to create financial chaos. Can the U.S. outgrow the Chinese instead by cutting corporate tax from the top 35% to 25% or even lower?  

Sure, the U.S. had confronted more-hostile enemies before namely the Nazi Germany and the Soviet Union but it had never had to contend with a rival that matched it in economic strength. Maybe a China economic bubble burst would do U.S. a favor by pulling the Chinese further away from matching the U.S. Maybe the Chinese would be happy to just suppress its currency further so that the U.S. can maintain it’s number one position (and to make U.S. happy in the process).

source : financetwitter

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