It would be great to concentrate on market fundamentals rather than the latest TWEET but as traders know, can’t play the cards that are not dealt. If the market wants to jump to the latest 140 character piece of informed opinion, then it is either use your own reaction function or fold up the lap-top and wait for greater clearance from trends and underlying fundamentals. The markets are presently in a binary mode. Chinese stock market gyrations impact global equity markets and all type of commodities and foreign currencies as traders “guess” what assets the Chinese might be selling to raise cash to meet stock market losses. The nature of a “collateralized, securitized” credit system is that it is subject to violent reactions because of its pro-cyclical element: Copper secures a loan and when copper prices rise the lender offers more money because the value of the security increases allowing an increase in liquidity.
The same relationship existed in the U.S. when HOUSING PRICES were rising and Fed Chair Greenspan was advising people to use their homes as piggy banks: Refinance your home and take the increased value to pay for boats, college, vacations and a bigger, newer home. A problem only arises when the underlying collateral becomes less valuable and the lenders demand more money to secure the loan. If the Chinese have pledged warehouses filled with copper and the commodity depreciates 30%, the borrowers are required to supply more money or the collateral is sold as the bank calls in the loan.
In today’s world everything serves as collateral through the phenomena of financial engineering. It is difficult to determine the value of many resources when they act as collateral as well as a useful input into the production process. The dual character of all resources results in confusion for investors and users. Stored copper in warehouse vaults results in positive feedback loops when prices rise,as borrowers and manufacturers compete for the precious resource. When the economic fundamentals change, copper prices suffer from producers and lenders both competing to unload product causing an adverse feedback loop. It becomes a race to the bottom.
In yesterday’s Financial Times, a Henry Sanderson article titled,”Gold Shirks Its Haven Role During Twin Crises,” notes that GOLD has failed to serve its traditional role of being a store of value in turbulent times. The article quotes Leon Westgate of ICBC Standard Bank: “The precious metals markets were reminded yesterday that the utility of gold and silver at times of financial stress is primarily as a source of cash to fund margin calls and repair damage to balance sheets and bank accounts.” Thus it is difficult to determine what is driving gold prices. Chinese liquidation to meet margin calls or the rising fear of global deflation for another quoted in the article raises the issue of the problems of China and Greece are not inflationary events and thus not a positive situation for GOLD.
In my opinion, which longtime readers of NOTES are well aware, it is not inflation that drives GOLD but rather investor fears that the world’s central banks losing their credibility. In the world of FIAT MONEY central bank credibility is the basis of a currency’s store of value. If the ECB and the People’s Bank of China resolve to end the present uncertainties plaguing their economies with unlimited amounts of liquidity, GOLD and SILVER will be the immediate beneficiaries. The fundamentals of GOLD are very bullish when viewed through the lens of central bank actions over the last two years, especially in view of the inability of massive doses of quantitative easing to dramatically increase economic growth. How far will the Fed, BOJ, ECB, PBOC and others go in allowing their stimulus efforts to create financial instability?
In the recent BIS annual report, the central bankers’ bank takes the FED and others to task for allowing interest rates to remain too low for too long: “At the same time, signs of growing financial imbalances around the globe highlight the risks of accommodative monetary policies. The persistence of those policies since the crisis casts doubt on the suitability of current monetary policy frameworks and suggests that resolving the tension between price stability and financial stability is the key challenge.” Part of the growing financial instability is the use of various asset classes as collateral for securitizing all types of financial transactions. It will be important to be prepared with technical price levels to be aware of very significant levels of support as collateral is liquidated to raise cash.
During the past five years I have often noted the support level for GOLD to be the level of gold priced in Chinese yuan. Why? The Chinese have become the major consumers of GOLD, both for private reasons and the Chinese authorities have been building up the amount of gold reserves as a hedge against massive U.S. dollar assets that have accumulated in the Chinese Central Bank. The key level in this is 6975-7100 YUAN to an OUNCE of GOLD. This is significant because it relates back to November 2009 when the IMF sold 200 tons of gold to India when this was the price of gold in yuan. The Chinese had wanted to buy the IMF gold but were passed over by the Fund as the gold was sold to India. This level has held for several years so I think it bears watching.
***Further proof for the theoretical basis that “money is fascist,” craving stability over democracy and capitalism. The media has been rife with comments about how the communists in Greece, under the guidance of Alexis Tspiras, are the ones responsible for the failure of the European negotiations. Referendum results be damned, had the Greeks acted more maturely then some type of accommodation could have been reached and the present crisis brought to a short term resolution. The Greek communists are evil because they are fighting for debt relief, regardless of how onerous the conditions placed upon the Greek population. Tonight there is word of some sort of agreement–tweeted somewhere–but it will involve a new round of austerity. The forces in Greece for a YES vote was typical of the entrenched elite and the desire for stability over economic sanity. The pundits of fascism all claim that if the Greeks only paid their taxes the situation could be resolved.
Unfortunately, it is the Greek elite who have been adept at evading taxes and yet they are most vocal supporters of Greece in the EURO. The Greek power elite wanted the benefits of money flows from Brussels and the stability of a Bundesbank controlled currency while they stashed their cash and had no fear of currency devaluation in case of economic weakness. In regards to China, the financial media makes the leadership of Chinese Communist Party good guys because they act to support the continuation of elevated equity valuations. The Chinese stock market is an oxymoron for if the government can intercede to prevent sellers from bringing stock to market. It is not a market but the plaything of an authoritarian leadership. Again, stability trumps all regardless of any democratic outcomes.
Yes, Mussolini did make the trains run on time but what was the final cost? So it seems the Chinese Politburo hates the red arrows of the stock market as much as Joseph McCarthy despised the reds in Moscow and Beijing.
July 10, 2015 at 5:38 am |
The pricing mechanism is wrought with fraud and has no intention of ever delivering the physical metal itself. Cash settlement is the soup de jour. Fundamentals do not apply once again. How is it we are seeing world record physical buying of these two metals time and time again. JPM buying and storing an enormous amount of physical silver as we speak ,yet the price is sinking. The end is near. Truth bombs are coming,and this whole illusion of somehow cash is king will go poof. Gold is a hedge against the failure and ability of Govt’s to lead and manage. So it makes perfect sense for the CB’s & Govt to manipulate gold & silver and keep it off everyone’s radar.
July 10, 2015 at 6:42 am |
Yra, what do you make of the following? http://blogs.wsj.com/moneybeat/2015/07/10/pboc-gives-glimpse-of-its-bazooka/
“…In an extraordinary statement on Thursday morning before the market opened, the People’s Bank of China said it would lend an unspecified amount to the state-owned China Securities Finance Corp., which would use the money to support the stock market. This marks a departure from the CSFC’s original mission, which was to finance margin lending by brokers. Already, the CSFC has lent 260 billion yuan ($42 billion) to 21 domestic brokers for the purpose of buying shares, and also bought an unknown amount of stock itself directly.
This looks like quantitative easing with Chinese characteristics. Instead of buying bonds, as many central banks around the world have done, China is effectively printing money to buy shares. The difference is the PBOC is outsourcing the actual stock buying to an intermediary.”
so far QE in the western world has not been proven inflationary. conspiracy theories are circling that the CBs are buying stocks, but officially it´s all about bonds. what do you think – could a PBOC´s move to buy stocks be inflationary after all? if not, what would that mean for future monetray policy? do we just need friendly CBs to print our way to prosperity?
the latest actions of Chinese authorities to deal with a declining stock market have shown that they are acting like amateurs destroying any faith in markets. i worry that a migthy weapon as QE could be dangerous in those unskilled hands.
Thanks!
July 10, 2015 at 7:26 am |
I guess a default displeases the market Gods?
July 10, 2015 at 8:24 am |
Yra, my theory is ‘they’ push on the price of Gold whenever it should go higher in order to effect the psychology of the metal in investors minds.
The Greece situation over the last week or so should have added $20+ peraps more but it went sharply lower. This is important as a feedback loop because it reinforces investors minds that if Gold goes lower in such testing economic times (when it should go higher) then it’s pretty much finished as an asset class as it doesn’t do what it’s supposed to which is go up. They have done an excellent job over the last few years as Gold is only loved by a few and hated by the many.
Plus, as you rightly point out, a rising Gold price doesn’t make the central planners look good. So they will continue to lean on the price until it’s not possible to lean on it anymore. When that will be and at what price is the billion $ question.
My theory is simple – when the central planners do finally lose control (which is a guaranteed certainity because they always lose control) I would suggest they’re REALLY going to hit the price, perhaps $100 if not $200 lower over a month. Those lows will be the half buy, then if/when it explodes back on the upside (within a few weeks) that will be the other half buy and off to the moon we’ll go.
Until they do lose control I fully expect the price to go under $1,000. Nevertheless, I’m a smal buyer every month, high or low prices.
July 10, 2015 at 10:09 am |
Yra, my guess on Gold is that it will not rally big until the USA economy turns down.
Once that happens, the huge mountain of worldwide debt will start to implode on credit concerns, and that leaves Gold as the best haven.
That said, it might break initially, as everyone runs to cash.
I could be wrong.
July 10, 2015 at 10:47 am |
shocked–let the market tell us when it is right or wrong–just be prepared is this boy scout’s motto
July 10, 2015 at 11:16 am |
Good advice. We should all follow it.
July 10, 2015 at 12:00 pm |
Great article. And a string of great responses by all.
Regarding loans on Copper inventories in China, forget the price, what happens when the copper is not even there, and likely never was held in inventory?
July 10, 2015 at 2:15 pm |
Yra, who controls the ESM?
Is it the ECB, Germany, or is it somewhat independent?
If ESM decided that they wanted to lend to Greece, would Germany or ECB block it?
July 11, 2015 at 10:21 am |
Caught a TV show recently where the host stood on the public street offering passers-by their choice of a Hershey chocolate bar or a nice bar of silver worth probably 50 x more. The passers-by overwhelmingly chose the chocolate bar.
Perhaps the results wouldn’t have been quite the same if the silver was gold instead?
July 11, 2015 at 3:12 pm |
Chicken,
Immediate gratification wins most times. Maybe silver wins if the choice were a couple of Grandstand tickets to a Cubs-White Sox game?
July 11, 2015 at 4:59 pm |
[…] Red Markets, Gold, And China – Yra Harris […]
July 12, 2015 at 2:00 pm |
Shocked—the European Stability Mechanism could be blocked by Germany ,Dutch and finns the ECB will be very cautious and look to others to do the “dirty work” nor whatever it takes to keep Weidmann et al very happy
July 13, 2015 at 9:10 am |
How common are triple bottoms?