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Long gold, short China is the winning trade so far this year

 -- Published: Monday, 6 January 2014 | Print  | Disqus 

If you have been wondering what all those old Chinese aunties buying gold were telling us last year then this is it: go long gold and short China. So far in 2014 that has been the winning trade. Gold is sharply up, shares in Shanghai are tumbling.

Actually the Shanghai Composite Index is 60 per cent off its high and has been falling for several years. Gold took a break from its 13-year bull market last year but remains in an uptrend. However, both markets could be set for strong movements this year, albeit in opposite directions.

China’s black economy

When ArabianMoney visited China last April we came back warning of hyperinflation and a nation choking on its own pollution (click here). These are the classic symptoms of an overheating economy. Perhap this time is different, but then as our own private circulation newsletter pointed out to its subscribers things never are different in economic cycles (subscribe here).

The Asia Confidential newsletter this month recommends shorting Australian banks, the Chinese yuan, Fortescue Metals and the Australian dollar. It reckons these are better short positions than the Shanghai Composite whose large fall restricts the size of further down movements.

On gold we have never seen analysts’s opinions turn as fast as they have in the past week. Of the fifteen analysts surveyed by Bloomberg for the week ahead only two bears remain. Suddenly everybody who said gold was a slam dunk sell has reversed their position.

What’s happening now is a short covering rally in gold. Physical demand has continued to be very robust although it was showing signs of slowing at the end of last year due to falling prices.

Eagles soar

That said the US Mint sold 56,000 ounces of American Eagle gold coins in December, the most since June and contributing to a 14 per cent gain in annual sales. Those Chinese aunties have also been voracious buyers, no doubt sensing that a downturn was coming in their own economy as they suffocated under a cloud of smog.

What comes next in the Middle Kingdom is an old fashioned credit squeeze, exactly like 2007-8 in the US housing market. The government has prolonged the boom in infrastructure investment for as long as it can but there is a limit always to the expansion of credit that an economy can handle.

China’s credit expansion to $24 trillion from $9 trillion in five years is unprecedented in economic history and easily the largest bubble ever created in financial markets (click here). It is bigger than the banking systems of the US and Japan combined.

George Soros is among many hedge funds managers warning that China is the biggest risk in the global economy today. Chinese journalists are being instructed not to write negative stories (click here). Long gold, short China could be the winning trade for the whole year.


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