Monday , 4 December 2023

What Does Slowdown In China Mean for Gold Prices? (+2K Views)

China’s import and export market has been trended down since 2010 as China winds down its commodity financing deals…Chinese imports and exports of commodities were artificially kept up by this hot money coming into China and when all of this unwinds we will see industrial commodities plunge as they are beginning to do right now.

Evidence of the unwinding can be seen in a number of ways:

1. With many structured products priced in yuan, and now under a great deal of pressure (with some even defaulting), the yuan has been declining since the beginning of 2014 as shown in the chart below.
USD/CNY exchange rate

2. The one year support line of the Baltic Dry Index has been broken and a declining Baltic Dry Index points to a slowdown in the commodities trade.Baltic Dry Index

3. Further evidence can be found in the declining month over month Chinese power consumption.

China Power Consumption

4. Industrial commodities will perform poorly going forward and I believe copper will have the worst performance. If we look at the copper contango chart below, we can see that the trend has gone from backwardation to contango. These trends coincide with a rise in the LME stock level of copper. The consequence of this is a lower copper price in the near future. A lower copper price correlates to a weaker Asian economy and will also affect neighboring countries like Australia.

(click to enlarge)Copper Contango and Price

5 Year LME Copper Warehouse Stock Level

As can be seen above, the evidence is pointing to a slowdown in Asia and the emerging markets. I think this slowdown will also affect global markets and I expect a sell-off in the U.S. stock market as a result for the following reasons:

1. The total market capitalization of the entire U.S. stock market is in overbought territory compared to the U.S. GDP with a Total Market Capitalization to GDP ratio of 116%. The stock market is now valued higher than the top of 2008, where the stock market was in a bubble.

2. The technicals are deteriorating as the exponential curve upwards on the NASDAQ has not had a follow-through (See chart of NASDAQ below). Indeed, many trend forecasters… are expecting a “black swan” event to happen which could result in a drop of 20% in a matter of days…

(click to enlarge)NASDAQ

3. The Federal Reserve is becoming more dovish…which could point to a slowdown of tapering by the Federal Reserve in the future.

However, there are opportunities in such “black swan” events.

  1. With the unwinding of the “China Commodity Financing Deals”, China will not be able to suppress the paper price of gold anymore and this will put upward pressure on gold.
  2. With the U.S. stock market now inversely correlated to gold, any sell-off in the U.S. stock market should strengthen the rise in gold.
  3. With the end of tapering later this year the U.S. dollar is expected to decline and this would add more fire to the rising gold price.
  4. With funds buying physical gold again we have probably seen the bottom in gold.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.


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