The Bull Market In Gold Is Only Just Starting
By John Thomas, TalkMarkets As many of you know, my oldest son, John, is an English teacher at a government university in western China. He is fluent in Mandarin, Cantonese, Japanese, Russian, Korean, and of course, English. I was Skyping with him the other day, and he mentioned something that piqued my interest. There were lines forming outside the country’s newly opened gold coin stores. Gold ownership in the Middle Kingdom carried a death penalty until very recently. Furthermore, he learned that jewelry stores were packed while shopping for a birthday present for his new girlfriend, with newly enriched consumers loading up on not only gold, but silver and platinum as well. Many had their heads handed to them last year in the stock market crash. Stocks are now considered too dangerous a place in which to invest ones’ savings, so everyone is now pouring money into precious metals. I thought “Well, that explains a hell of a lot.” Then I saw a news item flash across my screen that further focused my interest. China’s Anbang insurance group was making a $12.2 billion takeover bid for the Starwood Hotel Group (HOT). This was a mere 24 hours after its $2 billion bid for my late wife’s former employer, New York’s Waldorf Astoria Hotel. This is not the first time that Chinese capital has flooded into the US. Recent years have seen a $5.4 billion purchase of the GE Appliance Division, $3.5 billion for Legendary Entertainment, and $4.7 billion for Smithfield Foods. So much money has poured into Napa Valley at wildly extravagant prices that a lot of very mediocre winemakers have suddenly found themselves billionaires. Locally owned vineyards have taken to posting “American Owned” signs out front. You can see them when you go winetasting. The cause for all of the above is the same. Capital is pouring out of China at an unprecedented rate. It is departing the Middle Kingdom to flee a weakening economy, collapsing stocks, a weakening Yuan, a capricious government, political oppression, censorship, a crackdown on corruption, and the lack of local investment opportunities. Fear of a revolution that strings up all the billionaires is another motivating factor. Today, China boasts more newly minted billionaires than any other country on earth. It is fleeing towards the United States and towards the hard metal equivalent, gold. As much as this year’s political candidates decry the state of our economy, everyone else in the rest of the world wants to send their money here as fast as they can and bring themselves with it. What is most important is for you and me is that this is a major macro trend that has only just begun. Gold is a particular target of the Chinese because of the country’s long-term cultural affinity with precious metals. Look at any historical contracts between China and the west and quantitates of exchange are identified in taels of gold and silver. This ended with the communist government, which forced citizens to turn over all gold and silver holdings to the government. What we are seeing now is the unleashing of 67 years of repressed gold consumption by a newly rising middle class. It is highly reminiscent of the 39-year flood of gold buying let loose by President Richard Nixon’s removal of the US from the gold standard in 1972. As you may recall, that stampede lasted for eight years and took gold up from $34 to $900 an ounce. I was found standing in line in Johannesburg unloading my stash of krugerrands right at the market top. China is already the world’s largest gold producer, the actual amount of production is anyone’s guess. It is also the second largest importer, after India, unable to sate domestic demand. The yellow metal is a natural target for Chinese flight capital. We are still close to the bottom of a five-year bear market in gold created by an unremitting seven-year bull market in global stocks. Only three months ago, the Federal Reserve was threatening eight consecutive quarters of 25-point interest rate rises, according to former governor Richard Fisher. When the stock market threatened to commit suicide as a result, that was taken off the table. The latest rally will allow the Fed to give us one, or possibly two more quarter point rate rises this year, but no more. In the meantime, the rest of the developed world, like Europe and Japan, has moved to negative interest rates, in some cases quite impressively so. This is fantastic news for gold, and has given us some meteoric moves in both the barbarous relic and the miners. There is more good news to come. Slowing global growth, the prospect of more sudden Yuan devaluations, and rising energy debt defaults in the US have all made gold sparkle more brightly than ever. Not only that, we are starting to see the seeds of nascent inflation, long a major gold driver. Hiring has been on a tear in the US, with the headline unemployment rate plunging to 4.9%, a decade low. Ratchet it down to 4.5%, and new wage demands will become irresistible. This has long been considered by economists to be the “full employment rate”, where everyone in the country either has a job, or is in between jobs, except for my cousin Milton, who hasn’t had a job in his life. We all have cousin Miltons. All that is needed is a good entry point, always the million dollar question. Wait for the current rally in stocks to eke out a few more points, which will bring further gold weakness. Then jump into (GLD) calls, call spreads, outright ETF shares, and gold miners like Barrick Gold (ABX) and Newmont Mining (NEM) with both boots. It’s a trend even my cousin Milton can spot.