Gold and China: Where the Bulls and Bears Square Off

Sunday, March 25th, 2012

Gold and China: Where the Bulls and Bears Square Off

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

To paraphrase the great Steve Martin, today’s investors are very passionate people and passionate people tend to overreact at times. An overreaction is exactly what’s happened in gold and global markets in recent weeks. While market bulls have been sniffing out data points to support their case, market bears have continued to take a glass-half-empty approach.

Gold and China are two areas that have been caught in the bear trap this week, but we believe the gold and China bulls still have room to run.

Short-Term Challenges for Gold
Rising bond yields, a stronger U.S. dollar and an improving U.S. economy have squelched expectations for a third round of quantitative easing (QE3) and consequently, spelled trouble for gold. Since late February, gold has declined more than 7 percent.

As confidence improves, UBS says the yellow metal is losing the dual role of safe haven and risk asset: “Gold is moving off center stage, while growth assets are moving to the fore.” Earlier this month, we saw the largest weekly contraction in long gold positions on the Comex since 2004.

As I wrote in my blog this week, the selloff has pushed the price of bullion below its 200-day moving average for only the 30th time over the past 10 years. Over this time period, gold has declined on average 2.1 percent over the 10 days following the cross-below date. This means we’re likely only one-third into the correction in terms of price and duration.

All is not lost for gold. In his latest Gold Monitor, Dundee Wealth Economics Chief Economist Martin Murenbeeld lists 10 positive factors for gold, one of which is monetary reflation. We are currently experiencing one of the greatest global liquidity booms the world has ever seen. Over the past seven months, there have been 122 stimulative policy initiatives from central banks around the world, according to ISI Group.

You can see from Canaccord’s chart below that injecting liquidity into the global monetary system has been a steroid for stronger gold prices over the past decade. The global monetary base has ballooned three times larger, with gold increasing nearly six-fold.

While we are seeing strong signs of improvement in the global economy, it’s important to remember that the recovery has been built upon a mountain of printed money that cannot be hastily unwound. Dr. Murenbeeld explains, “money doesn’t grow on trees; it will have to be borrowed by some government and/or it will have to be printed by some central bank.”

This is why we believe the bull market for gold remains intact.

Overreaction on China
Indication of a Chinese economic slowdown and negative comments from BHP Billiton regarding its outlook for Chinese demand caused anxiety for investors this week.

The March HSBC Flash Manufacturing Purchasing Managers’ Index (PMI) fell 3 points from the previous month due to weakening domestic and external demand.

However, Macquarie says, “it’s not that bad out there.” The firm’s research shows that relatively strong demand from China during the first two months of the year has had a positive impact on global commodity prices. Macquarie says, “while there is undoubtedly a slowdown taking place in Chinese economic growth as a result of domestic policy tightening and weaker export growth, the impact on commodities demand has been negligible.”

As for the BHP comments, Barclays says that they were misconstrued, stating the “BHP executive was by no means bearish on near-term Chinese demand prospects and comments referring to a softening in Chinese steel demand were largely focused on the scenario post 2025 … the notion that iron ore and steel demand growth is unlikely to grow at a double-digit pace forever is not a surprise to the market.”

Bright spots in China’s economy aren’t hard to find. Barclays reports that the backlog of manufacturing orders saw its largest month-over-month increase since 2005 from January to February of this year. Supported by an all-time high in gasoline demand, Chinese oil demand reached a record high in February. Gasoline demand was resilient despite Beijing hiking prices by 4 percent in February due to higher oil prices. The Chinese government followed that up with an additional 7 percent hike earlier this month. Auto sales increased nearly 24 percent year-over-year (13 percent sequentially) in February, the largest increase since November 2010, according to UBS.

While rising fuel costs are a hot-button issue here in the U.S., CLSA’s Andy Rothman says that the higher fuel prices will only modestly impact Chinese consumers because few come in direct contact with unsubsidized gasoline. CLSA estimates that fuel accounts for only 2 percent of China’s Consumer Price Index (CPI) basket, compared to 5.4 percent in the U.S.

We’re also seeing positive developments in an area where Chinese consumers are vulnerable—housing prices. According to CLSA and China’s National Bureau of Statistics, home prices fell in 27 cities on a year-over-year basis during February, three times the volume in December. In addition, none of the 70 cities tracked reported more than a 5 percent increase in new home prices. A gradual reduction in home prices is exactly what the country needs to prevent a major housing crash, but don’t expect the Chinese government to let the bottom fall out.

Remember, the minimum cash down payment for a Chinese home buyer with a mortgage is 30 percent. Investors are required to put 60 percent down in cash. Currently, about one-third of home buyers are paying all cash, according to CLSA. Andy says the government is poised to relax the country’s strict housing policy measures as soon as this summer if the decline accelerates.

Tags: Bear Trap, Bond Yields, Bulls And Bears, Case Market, Central Banks, Chief Economist, Chief Investment Officer, Commodities, Commodity, Dual Role, Dundee Wealth, Frank Holmes, Global Liquidity, Growth Assets, Martin Murenbeeld, Moving Average, Overreaction, Policy Initiatives, Qe3, Selloff, Term Challenges, U S Global Investors
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Sentiment Signals: Bulls and Bears Approach Neutral Levels

Monday, January 31st, 2011

The results of the latest AAII Investor Sentiment Survey show that the bullish and bearish sentiment readings have eased further from the previously extreme levels. For the week ended January 26, 2010, the bulls declined to 42.0% from 50.3% two weeks ago and the bears increased to 34.3% from 29.1%.

Nonetheless, bullish sentiment stayed above its historical average of 39% for the 21^st consecutive week – the second longest streak in the Survey’s history since inception in 1987. Bearish sentiment climbed to its highest level of pessimism since September 2, 2010, marking only the fourth week since then that bearish sentiment has been above the historical average of 30%.

Sources: AAII Investor Sentiment Survey; Plexus Asset Management.

Wheras the AAII Survey focuses on individual investors, the Investor Intelligence Survey deals with financial newsletter writers. This survey measured sentiment over the same period as the AAII and indicated bullish sentiment dropping to 55.1% from 56.0% during the previous week – a reading somewhat below the October 2007 all-time high of 62.0%. The bears were down to 19.1% from 20.9%.

Although I do not have raw data going very far back for the Investors Intelligence series, the combined AAII and Investors Intelligence Surveys nevertheless make for interesting reading.

Sources: AAII Investor Sentiment Survey; Investor Intelligence Survey; Plexus Asset Management.

Tags: Aaii, Asset Management, Bearish Sentiment, Bullish Sentiment, Bulls, Bulls And Bears, Extreme Levels, Inception, Individual Investors, Intelligence Survey, Investor Intelligence, Investor Sentiment, Investors Intelligence, Newsletter Writers, Pessimism, Raw Data, Reading Sources, Signals, Surveys
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Gold Bulls and Bears Debate Outlook

Friday, November 26th, 2010

Is gold headed for another streak of records? Gold bears and bulls square off at San Francisco’s Hard Assets Investment Conference.

Source: The Wall Street Journal, November 22, 2010.

Tags: Assets, Bulls And Bears, Debate, Gold Bulls, Investment Conference, Outlook, San Francisco, Wall Street, Wall Street Journal
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The Battle of the Bulls and Bears (Hewison)

Friday, June 11th, 2010

The battle between the Bulls and Bears continues with very choppy trading action. The rally from a potential double bottom is cause for concern for the Bears, however the Bulls are in a similar situation as they have to prove their case with sustained market action.

Click on image or here for video:

In his new video, Hewison outlines some of the key levels that he thinks are important in the S&P 500 market. Volume continues to to be light and that is why the markets are moving around and are so volatile at the moment.

Tags: Battle Of The Bulls, Bulls And Bears, Double Bottom, Market Volume, Moving, Rally
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Why Gold will Not Make New Highs or Lows This Year

Tuesday, March 30th, 2010

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This article is a guest contribution by Adam Hewison, CEO of MarketClub.

Title: Why gold will not make new highs or lows this year

Gold has had some dramatic moves in the last eighteen months and we expect it will have some equally dramatic moves in the future, but not right now.

Click on the image to view:

While I recognize that gold is one of the few commodity markets that people are really passionate about; the purpose of this article is not to take sides either with the gold bugs or those who reject the argument that gold is forever.  Rather, I want to discuss my interpretation of the markets cycle.

After spot gold made an all-time high against the dollar on December 2 at $1,226.37, gold has been in retreat mode. For the for the past several months gold has been in a broad trading range, seemingly unable to move one way or another. This process has created frustration from bulls and bears alike.

Here is the dirty little secret about the gold market. It can be a horrible investment and here’s why:

Gold first started trading in the 80s while I was on the floor of the Chicago Mercantile Exchange in Chicago as a member of the International Monetary Market, (IMM) which was at that time a division of the CME now the CME Group.  When gold opened up the public clamored to buy into the gold futures market and guess who sold it to them? That’s right it was the pros- the guys who made their living trading. As a result, gold hit an all-time high of around $850 an ounce back then and it took almost 25 years for gold to move over that level, at least in dollar terms. I don’t know what your timeline is, but 25 to 30 years is an awful long time to get even again.

So what is really happening in this market?

Everyone is aware of the problems in Europe with Greece, Portugal and a host of yet to be named countries. We all know that the huge amount of money being printed, coupled with the bank failures abroad contribute to the dollars declining value. These events, in conjunction with the American governments actions, also contribute to the devaluation of the dollar. The government claims that this is beneficial to exports, but the bottom line is that the purchasing power of the American dollar continues to erode in world markets.

Based on the declining value of world currency against gold you might ask – why isn’t gold trading at $2,000 or even $3,000 an ounce? What is wrong with this market? This is because a great deal of what goes into the gold market is psychological and reacts to cyclic trends driven by both psychological and economic factors.

So what does all this have to do with the price of gold now? It has everything to do with gold and nothing to do with gold.

Here is what I’ve been able to observe in the last several years in gold and seems to be holding true.  It is something that you should pay attention to if you’re interested in the next big move in the gold market.

Before gold can move higher it needs to create what I call an “energy field”.  The most recent energy fields in gold were between May 12, 2006 and September 20, 2007. This 17 month energy field saw gold prices oscillate between a broad trading range bound by $730.08 (upside) and $541.80 (downside).  That energy field produced enough power to propel gold to the new high of $1,012.40 on March 17, 2008. This marked the first time gold exceeded, in dollar terms, the highs set in the early 80s mentioned earlier.

The energy fields I have observed for gold are taking somewhere between 17 and 18 months to complete. If the energy field holds, then the December 3rd 2009 high of $1,226.37 should remain in place for quite some time. If the same cycle remains true then the recent lows that we witnessed, at $1,050, should also remain intact as they represent the 15 to 16 month cycle low.

To summarize: I expect gold to be locked in a broad trading range for the next 12 months bounded by the December 09 highs of 1,226.37 and the lows of $1,050.00. If the gold cycle holds true, we expect that gold tops the $1,226.37 marker by April or May of 2011.

On the on the upside we will also be looking for gold to make a nature cyclic high in October or November of 2011. It’s impossible to predict the future with any degree of accuracy; however when we look at the cycles in gold this reads as a pretty good bet.

No matter what happens we expect gold will offer some great trading opportunities that investors and traders should be able to take advantage of.

As I always discuss- in trading one should approach gold or any other market with a game plan and proper money management stops. The key to success in this decade will be an investors willingness to move in and out of asset classes such as gold and be well diversified into more than one asset class. That way you wont be left holding the bag for the next 25 years. Our World Commodity Portfolio is a good example of this approach and one I believe will serve investors well in the coming years.

Tags: 80s, Amount Of Money, Bank Failures, Bulls, Bulls And Bears, Chicago Mercantile Exchange, CME, Commodity Markets, Dirty Little Secret, Dollar Terms, Frustration, Gold, Gold Bugs, Gold Commodity, Gold Futures Market, Gold Market, International Monetary Market, Lows, Move One, New Highs, Ounce, Spot Gold, Timeline
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The ABCs of Stock Trading

Monday, October 12th, 2009

David Blair, writer of The Crosshairs Trader blog, has compiled a list of simple, yet very fundamental truths for stock traders based on the letters of the alphabet. David is also the author of the excellent trading e-book, When 10 is Greater than 90.

A wise man chooses to do in the beginning what the fool is forced to do in the end.

Better to be wrong and rich than right and broke.

Create an atmosphere of confidence and you will never choke on the bone of contention.

Develop an edge and stick to it. If you are not living on the edge then you are falling off of one.

Enter the market prepared or you will exit impaired.

Forget the last trade or the market will steal your next one.

Giving in to emotional bias is akin to giving up.

He who chases three rabbits catches none.

If it sounds to easy to be true then it is neither easy or true.

Just say no when the market has said yes one too many times.

Keep what you have by not keeping what you never intended to have.

Losers justify and winners rectify.

Make time for self.

Noise is the mother of doubt.

Obvious trades can lead to blind faith.

Poor execution can result in a broken disposition.

Quitting is not a fork in the road but a dead end street.

Reason looks for support in the past while judgment considers the weight of the future.

Stocks move first and ask questions later.

Timing the market is like winding a clock that has no hands.

Understand yourself first and the market last.

Voice your opinion in mute mode.

Wishers become has beens when what has been becomes a wish.

Xtra time in the market could spell disaster in the home.

Your ability to win is based on your willingness to lose.

Zoos welcome bulls and bears but pigs…

Source: David Blair, The Crosshairs Trader, October 6, 2009.

Tags: Abcs, Ake Time, Blind Faith, Bone Of Contention, Bulls And Bears, C Reate, Chases, David Blair, E Book, Eason, Eep, Fundamental Truths, Letters Of The Alphabet, Living On The Edge, October 6, Oise, Rabbits, Stock Traders, Stock Trading, Wise Man
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Melt-up Fuels Investor Confidence

Friday, June 12th, 2009

Last week Raymond James’ strategist Jeffrey Saut discussed underperformance angst, and how the sentiment is helping to drive stock prices higher, due to skeptical asset managers caving in to performance pressures from clients, peers and benchmarking. This is also referred to as melt-up, the opposite of meltdown:

MarketFolly.com (via SeekingAlpha): We believe that while there is massive panic on the downside as the market tanks, there is equal panic to the upside. Those who miss the initial ramp up begin to panic that they are missing the major move. Then, as the move becomes even more substantial, underperformance angst begins to set in. If you are a fund manager and you are underperforming the markets, you begin to panic. That same panic you felt when the market plunged 40% is now resurfacing as the market rips 30% higher right in your face. It then becomes very tempting to join the herd. Long time readers will know what we think about the herd mentality. You are either with the pack, or against the pack. Buy or die.

Such recent market action can be summed up by the saying that you need to trade the perception, not the reality. And, even if all the buying makes no sense to you, you have to follow along. Otherwise, you’re down huge and you’re losing assets left and right. After all, the industry is now constantly focused on near-term performance, remember? One bad month? Sorry, we’ve got to pull our funds out.

In the midst of what can safely be defined as underperformance angst, it appears that individual investors are slowly regaining confidence, a sign that there may be more upside in the current rally, but also reasons to be cautious:

Bespoke: While some measures of sentiment still show that investors have been slow to embrace the equity market rally, other measures are showing that they are now more comfortable with it.  For example, the weekly survey of newsletter writers by Investors Intelligence shows that the spread between bulls and bears is at its widest level since January 2008 (47.7% bulls vs. 23.3% bears).  However, while Investors Intelligence is showing relatively bullish levels of sentiment, the AAII survey of individual investors is still dead even, with an equal number of bulls and bears (39.35%).

Mutual Funds are now in their 12th consecutive week of rapid inflows:

WSJ: Total estimated inflows were $13.6 billion in the week ended June 3.

Stock funds had estimated inflows of $4.63 billion, up from $1.59 billion the previous week. Weekly outflows from stock funds topped $10 billion earlier this year before the market started to rebound in March, boosting traders’ confidence that the end of the bear market might be in sight. Inflows were $2.83 billion at U.S. stock funds, also marking their 12th-consecutive week of inflows, while foreign funds took in $1.8 billion.

Fund managers, however, remain wary, despite the performance pressures:

WSJ: While a stock surge might force a mutual-fund manager to jump in because he is judged against the index, the pressure on hedge funds is less.

Many funds are skeptical the economy has entered a new period of growth that justifies high equity multiples. Others fear dislocations from governments shoveling money at problems.

Some noted stock pickers remain wary.

Steve Mandel’s Lone Pine Capital bought long-dated, out-of-the-money call positions representing 2.6 million shares of a gold exchange-traded fund in the first quarter, while Och-Ziff Capital Management Group and Atticus Capital have been cautious on the market. A call option is the right to buy a security at a certain price.

If stocks keep surging, hedgies might have to jump in with two feet, giving the market another lift. But their continued hesitancy should be a sign of caution for investors.

Tags: Asset Managers, Asterisk, Bulls And Bears, Downside, ETF, European Fund Managers, Folly, Herd Mentality, Individual Investors, Investment Strategy, Investor Confidence, Investors Intelligence, Market Rally, Market Tanks, Meltdown, Midst, Newsletter Writers, Performance Pressures, Ramp, Raymond James, Seekingalpha, Sentiment, Stock Prices, Strategist, Term Performance, Time Readers
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