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.              

Two Notable Developments in the 83 Years of History of China's Gold Market

This guy, Koos Jansen is really doing a great job in tracking China's gold market. His dragon chart  or infographic gave us an overview of how gold market in China has evolved in its 83 years of history from 1930 to 2013. Among numerous developments, I consider these two as the most notable: 

1. After 51 years, the Chinese government changed from its monopoly of the gold market and prohibition of private ownership of gold in 1950 to the abolition of such monopoly. In fact, since 2001, the central government has been encouraging its citizens to consider gold as a long-term investment. 

2. After 38 years, from 14 tons of gold mined, less than 1% of global production in 1975, China was expected to have an output of 440 tons, over 14% of global production in 2013. In the same year, China was in need of 4 tons per day just to satisfy its domestic demand. This made China not only the # 1 gold producer superseding South Africa, but also the # 1 consumer overtaking India.

In times of uncertainty and doubt caused by gold market manipulation, fundamentals like these encouraged me to remain patient and focused that investing in gold - bullion, coins, and mining shares - in the long run will gain the upper hand.  

Lesson # 2: Buying Shares

Huwag habulin ang presyo ng stock. Huwag magpadala sa sulsol ng mga hypers o sa tsismis. Maraming nalulugi sa ganiyang istilo ng trading, at unang-una na ako. Sa 181k na capital, 76k na ang total loss after a year of trading. Masyadong mahal naman yata ang ganiyang tuition fee bago matuto magtrade. 

The key is patience. Find a stock that is despised, and then wait. This is a better way than running after a climbing price.  

Trading Lesson # 1: Buying and Selling Your Shares

Sa takot mong maiwan, you buy up your chosen stock only to see later that your original bid was correct. This is the problem in buying. Greed is the primary emotional barrier.

Sa kabilang banda naman, sa takot mong lumaki pa ang loss, you cut prematurely only to see later that your original exit plan was correct. This is the problem in selling. 

Lesson # 1: Buy when you and traders around you are in panic. Be patient and throw your emotion. Sell when you and traders around you are euphoric. 

If you cannot do this, stop trading. The field is not for you. If you continue being controlled by your emotion, it is the certain way to ruin your savings and your capital. 

I think this is the reason why they say that the strongest enemy of the trader is himself. It is not market, neither bashers nor the hypers, but yourself. 

Buying a Stock: MRSGI and IDC

Before buying a stock, knowing its book value per share provides me a basis to determine whether the price I am paying for the stock is not overpriced. Such information is provided by PSE Edge. For example, you can check the book value per share of DNL by looking at its financial report. As of September 30, 2015, its book value per share is 1.69. Though in a downtrend, buying it at its current price at 8.80 is still expensive. If you divide its current price by its BVPS, you will arrive at 5.20 as the price to book ratio per share. Of course, there are other numbers to consider such as the company's balance sheet, earnings, and cash flow. And besides, with the good reputation of the company, many buyers consider DNL's market price still cheap. They consider it part of their long-term value investing in a growing company. 

Take another example. This time, let us look for PX. Based on its financial report as of September 30, 2015, its book value per share is 5.45. Compare it to its current price at 4.95 and compute its price to book ratio per share and you will have 0.90. Immediately, you will see PX is a bargain. But many avoid this stock simply because the mining sector particularly a gold stock is in a downtrend due to the price of gold in the world market and other regulations imposed by the government on the mining sector. 

How about IPOs? How can you determine if the price you are paying is not overpriced? This is my primary concern in this article particularly the two recent IPOs: MRSGI and IDC. If you are to check PSE IPO list, you will see that the offer price for MRSGI is 6.10 and for IDC is 4.20. 

In MRSGI's prospectus, you can find the same price, but in the case of IDC, its 3.60. On their IPO debut, MRSGI's starting price was 3.99 and IDC remains 3.60. MRSGI ended its first trade with a 0.25% increase at 4.00 while IDC with 17.22% increase at 4.22. At present, they are trading at 3.83 and 3.86 respectively. What puzzles me about these two stocks is the information provided in their prospectuses related to their prices prior to and during their IPO. Here's MRSGI's number:

   

There you can see that MRSGI's price as of June 30, 2015 was 1.27 described as Net Tangible Book Value per Share (NTBVPS). After the offer, the pro-forma NTBVPS was 2.28. And then the final price described as "dilution to investors in the offer" was 3.82. 

Now my question is, where did MRSGI get the 6.10 offer price posted at PSE IPO list and found in its prospectus? Why is there such a big discrepancy between 3.99 as starting price on its IPO debut and 6.10 as posted at PSE? Is this the standard format in doing IPO? If it is, how come IDC did not follow such format on its debut day and followed instead the 3.60 price given in the prospectus? 

Someone said that MRSGI was actually discounted on its IPO day. Really? If it was, how come its underwriters were selling on the first trade? Is it not because the pro-forma NTBVPS of MRSGI is far below than its 3.99 offer price? 

Let us turn to IDC. In the case of IDC, there are two prices given as its NTBVPS as of June 30, 2015: 0.50 and 0.39. Which one is true? The Pro-forma NTBVPS after the offer is 1.14. The dilution to investors is 2.46. 

  

Now my question, where did IDC get the 4.20 posted at the PSE? If MRSGI right now is trading at 3.82, which is the price labeled as "dilution to investors," is it possible that the 3.86 current price of IDC is still overpriced and that the stock could also go down to that "dilution to the investors" price at 2.46?