Bear Trap?

With recent stock market sell-off, I encounter two sets of popular recommendations. For those who are bullish, "don't scare yourself" and "buy the dips" are their favorite recommendations and they see price drop as an opportunity to add to their position. On the other hand, for those who are bearish, "sell the rallies" and "it's now time to exit the stock market and buy the bonds" are the two most typical recommendations. Whose voice is correct?

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After reading Adam Hamilton's "Bear Trap for Bulls," I wonder how many investors listened to his warning about the danger of the tech bubble. Now that we are in a far bigger bond bubble, I am just curious if his 2000 article has something to say this 2016. Here's two paragraphs from his article: 

He said that both investors and traders forget "that just as real life bears are extremely intelligent and cunning, so are bear markets. The 'goal' of the bear market is to lure as many bulls as possible to their doom. In order to accomplish that devious stratagem, a bear market usually takes years, slowly breaking individual investor sentiment over the inquisitor’s wheel of ever accumulating losses. The initial drop of the DJIA in 1929 from 381 to 199 was 48%, and took about two months. . . Here is where it gets REALLY provocative. From the temporary bottom of 199 in November 1929, the DJIA retraced 55% of its losses, closing near 300 in April 1930. The bull was back, right? Wrong! Contrary to a cacophony of bullish predictions, the DJIA plunged into a gut-wrenching dive and burned in over two years later. DJIA 300 would not be seen again until 1954, an amazing 25 years after the dead cat bounce!"

"I suspect, in the light of history and investor psychology, a big, hungry, and mean bear is hiding out in the rocks surrounding the financial markets. He is up high and out of sight, and is silently licking his chops, a blood lust in his eyes as he eagerly salivates over the fat and tasty walrus tech stocks lounging below. Always retaining the crucial strategic advantage of surprise, he will strike when the timing is right for him, and when the perceptions of safety in the tech herd are the strongest. He hasn’t eaten for almost thirty years, and his rage continues to multiply exponentially. He is biding his time, laying in stealth, and the walruses have no fear. Make no mistake, however, the bear will have his way when he considers the timing right!"

Plundering the Nations and an Interview with Alex Stanczyk

I recently stumbled with Koos Jansen who blogs about China's gold market. After browsing his articles, I observe that his articles are solid, and so I decided to track them down, particularly those that would be of interest to me and would provide me a guide in my own trading and investing. In this post, I just want to summarize the contents of his 7 July 2013 and 9 September 2013 articles.

In the first article, "Chinese press on gold and the dollar hegemony," Koos Jansen narrates three things: (1) that China is well aware about the relationship among gold, oil and the USD, (2) that China knows the subtlety how the US plunders the world using the USD as world reserve currency, and (3) that China is well-informed about the role of gold in the approaching global financial reset.

I got three key insights from reading the above article: (1) QE is actually a subtle form of stealing the wealth of nations, (2) Gold, oil and commodities have positive correlation, and (3) Gold and the USD index has negative correlation.

To my mind, three things have been confirmed. First, whenever the price of oil and commodities are down as it is today, this shows that the outlook of investors about future economic development is negative. Second, USD rising is an indication of deflation. And third, the price of gold rising shows that the people no longer trust the existing financial and political system and they are looking for ways to protect their finance from an approaching crisis.  

The second article is an interview with Alex Stanczyk for him to share his opinion about the gold market in general and the China gold market in particular. As for me, the most interesting part of this article is the letter from the Federal Reserve that Alex sent Koos. 

I just want to limit myself to the three questions raised by Koos Jansen. They are related to China's gold market, gold trade cycle and gold manipulation as of 2013. 

As for China's gold market, three things caught my attention: (1) three reasons why the Chinese government encouraged its citizens to own gold, (2) Weiqi, an unusual game , and (3) gold as China's priority investment. 

Alex shared three reasons why China has been so aggressive in its gold accumulation campaign: (1) to divert capital from real estate and equities into gold, (2) to prepare the people in case inflation threatens the economy. In this case, gold stabilizes the society to prevent civil unrest, and (3) in case of economic crisis that the people are in need of cash, the government would gladly buy the citizens' gold. That would increase the government gold reserve, which is consistent with their national gold strategy.  

To explain the importance of Weiqi, let us quote what Alex said:

There is this game that the Chinese play, it’s called Weiqi (pronounced Way Chee), and it’s similar to chess. In Weiqi you have to surround your enemy slowly and lay a trap, and than close the trap all at once. That’s the way the Chinese think, they don’t really disclose what their plan is, they just move tiny pieces around the board in a seemingly incoherent way, but when all the pieces are lined up that’s when the trap is sprung. All of the government party leaders play this game, and the CEO’s and chairman of China’s largest businesses are all part of the party. 

Knowing the importance of Weiqi, it now makes sense to me why the moves of Chinese government seem disconnected. Reading popular articles written by western economic and financial commentators, it appears to me that the gold market is going in the direction according to China's "incoherent" plan.   

As stated above, one of the reasons for China's aggressive gold accumulation campaign among its citizens is the diversion of capital from real estate and equities into gold. This shows that for the government gold is a priority investment. This is in line with the government's overall purpose that in the span of five years beginning 2013, the "plan is to curb real estate and equities investment and get more people investing in gold." Knowing this, it now make sense why recently numerous bad news are coming out related to China's real estate industry and the stock market, and yet when it comes to gold, China is still keeping the western world in the dark.   

As for gold trading cycle, Alex thinks that the bottom is already done and that the fundamentals remain intact. This implies a bullish trend for gold since then.

And then finally, concerning gold manipulation, Alex sent Koos a letter from the Federal Reserve proving that for the Fed, managing the price of gold is a must "to maintain control of the global currency system".  Arthur F. Burns, Chairman of the Federal Reserve wrote this letter on June 3, 1975. In this letter, we see that the primary concern is about placing a "ceiling on the gold holdings of an individual government," a position that the Federal Reserve favors. Reading this letter, I realized at least four things: (1) the Fed does not like gold to be part of the monetary system. It also does not like gold to have a market price, (2) the Fed's position is different from the US Treasury as to gold ceiling, (3) the Fed is a socialist institution, and (4) the Fed wants a monopoly of inflation. 

     

Is 2016 good for gold?

This article basing on astrology claims that 2016 is good for stocks and bad for gold. Another market analyst shares a bullish sentiment for stocks, but not necessarily bearish for gold. But as for me, though I think 2016 is good for gold - bullion, coins and mining shares, I worry that as a result of market volatility as 2016 starts, gold is receiving unnecessary publicity. However, my positive perspective about gold was shaped by three anticipated events this 2016:

1. After reading several gold investment articles, I am expecting that this April 2016, gold pricing power will shift from both COMEX (New York) and LBMA (London) to SGE (China). 

2. For investors who are willing to wait until October, we will see the impact of the official acceptance of Yuan into the IMF's SDR on the international monetary system. That could be a signal of the long-awaited financial reset where the USD will be revalued. 

3. Lastly, after the November US election, one expert claims that the USD is also expected to decline. I think that will also be good for gold.

2016's Top Performing Sector

There is no suitable day to write a 2016 prospect about gold market than December 31, 2015. Adam Hamilton did this when he wrote his article, Fueling Gold's 2016 Upleg on last year's final day. After reading his article, my conviction has been strengthened that I made the right decision when I bought shares of a gold stock the day the price of gold went down in anticipation of FFR hike. In this article, I just want to share five key insights that I got that made our writer conclude that "gold stocks should be 2016's top-performing sector."

1. The price of gold suffered big blow as a result of QE3. Gold's average price in 2012 according to Hamilton was 1169 USD per ounce. Since then, its price went down as the Fed started manipulating traders' sentiment with its "open-ended" QE3, meaning a QE that "had no predetermined size or end date." With the uncertainty brought by QE3, both gold speculators and investors turned bearish on gold as a result of capital migration levitating the stock market. So far, such sentiment could be justified. What's illogical for Hamilton is the continued belief of both speculators and investors that even the gradual decline of QE3 that finally ended on October 2014 was still bearish for gold. He asked: "If the largest inflationary event in world history was ludicrously very bearish for gold, then why would the end of QE3 prove bearish as well?"

2. The recent FFR hike is bullish for gold. Adam Hamilton studied the performance of gold in relation to Fed's rate-hike cycle since 1971. He came to the conclusion that gold performs best when FFR entered near gold's secular lows, and rate increase is gradual. And such is the case that we have right now. 

3. FFR increase will demolish the false basis for selling gold. As already noted, gold bearish sentiment is irrationally based on both QE 3 and its cessation. And then the rate hike was added as additional basis for such emotional response. However, contrary to expectation, the price of gold did not collapse after the Fed decided to end 7 years of ZIRP last December 16. Hamilton describes it this way; ". . .the Fed actually hiking rates for the first in 9.5 years, ending 7 years of ZIRP, will serve as the acid test to shatter these false notions."

4. Normalization of gold prize this 2016 is inevitable. As both speculators and investors will realize that FFR increase won't slaughter gold, this will cause them to return.

5. There are three stages of gold buying that will take place in the coming months and years. The first stage will be initiated by gold futures short speculators; the second stage by gold futures long speculators, and; the third stage by gold investors themselves. 

Though I didn't completely understand the numbers involved in Hamilton's computation, what follows are the only numbers that made sense to me. He said that in order for gold futures short speculators to cover their shorts, they have to purchase 102.1k contracts or 317.6 tonnes of gold, which is a 139% increase in gold demand. As for gold futures long speculators, they need 98.8k contracts or 307.2 tonnes. And then finally as for gold investors, in order to change the 0.115% "ratio of the value of GLD's holdings to the S&P 500's collective market" to 0.475%, they need to increase their holdings more than four times. 

Reading financial information like this, I think it's better to position oneself as early as this time before this 2016 gold rally starts.