Understanding China, Gold And Seasonality

The pressure on the US stock market continues to grow.  Note my red annotations on this key S&P500 earnings chart.

With QE gone, rate hikes on the horizon, wage pressures growing, and the business cycle peaking, it’s a “no brainer” that US corporate earnings are disintegrating. 

Also, the ongoing American government attempts at regime change in the Mid-East have turned into a nightmare.  It’s likely just a matter of time before a horrific attack on American soil causes another 911-style US stock market crash.

The US stock picker can do well, even in a down market, but the focus for the index investor needs to be China and India, with some caveats.

This Dow Jones chart compares the price action of Chinese A shares, where Chinese gamblers operate, to the Hong Kong H shares market that I focus on.

Price to earnings ratios on the A shares market are the highest of any major market in the world, and they are the lowest for the H shares market.  Clearly, Hong Kong has barely “yawned” over the past few weeks.  

It’s important for the Western gold community to understand that China is home to the world’s biggest gambling community.  The average Chinese A shares investor holds a stock for about two to three weeks. Then they sell it, and take another gamble.

In the West, this magnitude of gambling is unheard of and difficult to conceptualize, but it’s nothing out of the ordinary in China.  To keep the gamblers reasonably happy at the tables, the PBOC (Chinese central bank), Chinese brokerages (bookies in suits?), and the country’s sovereign wealth fund have all recently committed various types of support to the A shares market.

I make such large dividends from my Chinese H shares that capital gains are irrelevant.  The bottom line is that the A shares market is a fabulous casino for the world’s biggest gamblers, while the H shares offer value-oriented Western investors outstanding long term value for conservative investors. 

What about gold?  That’s the seasonal gold futures chart, courtesy of Dimitri Speck.  I’ve highlighted the typical “triple bottoming action” that tends to occur in the June – August timeframe. 

That’s the daily gold chart.  I’ve highlighted the seasonal price action on it. This year, the gold chart looks like it came out of a seasonal chart textbook.  Gold made a low in mid-June, briefly rallied, and has declined, in typical seasonal manner, into the first week of July. 

Another short rally can be expected from “about now”.  That rally should be followed by a slow decline into a final seasonal low in the first week of August.

There’s more good news for gold investors.  This spectacular chart from Saxo Bank shows the action of leveraged hedge funds on the COMEX.  Conspiracy buffs often refer to it as the “CRIMEX”, partly because a lot of the trades put on by banks classified as “commercial” traders appear to be more speculative than commercial.

Regardless, the Saxo chart is a contrarian gold investor’s friend.  I’ve highlighted the peaks and troughs of hedge fund buying with green and gold circles, and done the same thing with the gold price. 

It’s clear that the funds have been major gold buyers at market highs, and major gold sellers at market lows.  Right now, the funds are holding a record short position, just as gold tends to make a major seasonal low!

Please click here now.  Fans of central bank action in the gold market should repeatedly read this key document from Yao Yudong of the PBOC.  Note the critical importance he assigns to gold for the internationalization of the renminbi (yuan).  Of the seven key points Yao makes, two of them focus directly on gold. 

Gold can play a key role in solving the global liquidity problems that will occur in the expanding sovereign debt crisis.  Western media focuses on the role of government, committees, and banks.  China focuses on the role of gold.  As more socialist governments get elected around the world, I suspect China’s focus on gold will be the one ultimately chosen by the rest of the world. 

Government committees can’t even handle the Greek sovereign debt crisis.  How will they handle a Spanish crisis, an Italian crisis, a Portugal crisis, and, ultimately, an American crisis?   

That’s the daily silver chart.  Silver looks better than gold right now, but rallies and declines are ultimately determined by gold itself.  As with gold, silver investors probably need just another month of patience, before the good times begin to roll! 

Attention gold stock enthusiasts.  This Goldcorp daily chart is very important, for a number of reasons.

First, Goldcorp is the largest holding in the GDX ETF.  It has swooned while competitors like Agnico Eagle and Newmont have rallied.  I think that’s about to change, and so does Swiss monster bank Credit Suisse.

Their analysts have just issued a $24 target for Goldcorp, and have rated it “outperform”.  From a technical perspective, amateur chartists may tend to think the recent decline below the late December lows in the $16.77 area was a “breakdown”.

Support and resistance zones are not “black and white” affairs.  Goldcorp appears to be successfully testing the December lows, and the enormous bull wedge pattern puts the stock in sync technically, with the fundamental analysis from Credit Suisse analysts.

That’s the daily GDX chart.  Note the great position of my 14,7,7 Stochastics series oscillator, at the bottom of the chart.  If Goldcorp begins to rally, and I think it will, GDX could stage a powerful rally, even in the face of a modest seasonal decline in the gold price!  

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