Gold: Don't Fight Beijing

I realize that most analysts in the gold community are nervous about gold, and nervous about China’s stock market.  In contrast, I think this is the greatest time in history to own both gold and the Chinese stock market.

Within a few years, I expect the mantra “Don’t fight the Fed” to be about as important as a rotary phone.  I’m not predicting that the Fed will fail as an entity, but the new mantra of global money managers will be “Don’t fight Beijing”. 

Chinese A-shares are widely followed by amateur analysts.  The H-share market is dominated by professional investors, analysts, and major money managers.  H-shares are Chinese companies that trade on the Hong Kong market, and that’s my focus.

Chinese financial shares are not overvalued.  They are undervalued and I would describe them as a “roaring buy”.  Globally, the financial sector has a P/E ratio of more than 15.  In China, it’s less than 8.

That’s a snapshot of President Xi Jinping.  He was apparently born in the “year of the snake”.  My suggestion to the gold bears and Chinese stock market bears betting against him is to… cancel their bets.

The drivers of higher Chinese stock prices are monetary easing/fiscal stimulus, reform in Beijing, and a structural change in small investor focus from real estate to the stock market.

Chinese stocks that are listed in Hong Kong sport an average P/E ratio of about 11.  Also, Chinese stock market indexes comprise less than 2% of global indexes.  Morgan Stanley creates the biggest indexes, and there are strong rumours that they are going to soon increase China’s share significantly.

Institutional money managers would be mandated by the index shuffling to reduce holdings in other markets, and buy China.  That could cause a gargantuan surge in Chinese stock prices, and I think most of the Western gold community should be poised to profit, when that happens.

I think Beijing wants slower GDP growth, a yuan that becomes a major global reserve currency, and higher stock prices for Chinese and Hong Kong markets.

As Chinese citizens and institutions build wealth, they will buy more gold.  I’m predicting that within five years, Chinese mining companies will control 70% of the world’s gold production.

A week ago, I highlighted this bull wedge pattern, and predicted that an upside breakout was imminent.

The breakout occurred, as did a “textbook” pullback.  The appearance of the bull wedge isn’t a guarantee of higher prices.  It’s simply one of many positive events occurring in the precious metals sector.

Western gold community investors should probably decide if they are invested in precious metals to benefit from the next $100 gold price event, or if they are focused on the “bull era” that is unfolding in China and India.  My focus is the bull era.

That’s the ratio chart of silver versus gold.  Gold is the ultimate safe haven for investors when financial system risk is high.  Silver is the ultimate asset when inflation rises without posing immediate risk to the financial system.

Silver now looks poised to outperform gold in all time frames.

That’s a long term US money velocity chart.  Velocity has been in a downtrend since about 1995.

Silver has generally underperformed gold during that time.  There have been periods of outperformance, but that’s been short-lived.  It could be argued that M2V has broken its downtrend, and is set to begin a major uptrend.

From a fundamental perspective, there’s no question that global wage pressures are building, and rising wages in China could bring inflation to America that is higher than expected.

Silver is the asset that will benefit most in this situation.  India’s citizens are the world’s largest buyers of both gold and silver.  As eager as Chinese citizens are to hold these mighty metals, India’s “titans of ton” spend an average of 400% more of their income on gold and silver, than China’s citizens do!

Incredibly, the average wage of hundreds of millions of Indians is only about two US dollars a day.  Over the next five years, I expect a tenfold change in those wages.  The ramifications of that wage price inflation for America, and for the price of silver, needs to be given serious consideration. 

The Bank of China has joined the new ICE/LBMA gold fix in London, and Zijin Mining, the largest gold miner in China, has launched an aggressive mine acquisition program in Australia.  These facts are much more important than anything that short term timers see on their gold charts. 

Charts don’t predict fundamentals.  Fundamentals make charts, and the gold bears have a choice of learning that the hard way, or the easy way.  As a nation, America is more than 200 years old.  The sun is setting on the aging empire of the West, and rising in the East.  That is creating a bull era for gold and silver enthusiasts around the world!

Drawing arrows on the gold and silver charts to prices that many Western analysts appear to fear, is not a professional way to build wealth.  That’s the monthly chart for gold.  Note the huge support zone created between the late 2009 highs near $1228, and the lows near $1045 in early 2010.

The entire price range of $1045 - $1228 is a major accumulation zone for gold.  Rather than using questionable tactics to predict whether gold moves a bit higher or lower now, all members of the Western gold community should now be focused on the theme of accumulation, especially for silver!

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