Exciting July for Gold, Greece, & China
- Gold 5-year low
- Greece exited the Euro almost
- Chinese stock market crash
- Falling commodity prices
- US stock market prediction
Gold 5-year low
The gold price closed on July 24, 2015 at $1,098 per troy ounce after hitting a low of $1,072. This was a 5-year low! It caught my attention, so I decided to blog about it.
An article in the Financial Times dated July 25 covered this topic. Some key points were as follows:
By using Google search, Bill Holter led me to Jim Sinclair who led me to Canadian billionaire Eric Sprott, all gold bugs. Eric Sprott said recently, "The demand numbers I’ve seen are way beyond the supply." Source.
Greece exited the Euro almost
It was on the weekend of June 27/28 that Greece surprised the world by announcing that it would hold a referendum and let its citizens decide on whether it should accept its creditors terms. This was instead of Greece reaching an agreement with its creditors before a June-end deadline.
On Sunday, June 28, equity futures around the globe were trading down more than 3%. On Monday, June 29, the S&P500 closed down 2.1% from the previous Friday's close. It was also the first day of a week-long bank holiday in Greece.
The Greek banks ended up remaining closed not for one week as originally announced but for a total of three weeks (through July 19). See timeline here. In the interim, capital controls were imposed (€60/day withdrawal limit; most foreign transfers banned.)
It is in this context that the price of gold hit a 5-year low. Actually, it hit its low in the first week after the Greek banks reopened, with the actual low occurring on Friday, July 24.
On July 23, the Greek parliament approved the agreement reached between Greece and its creditors. The Financial Times reported that Greece swallowed harsher terms than what was on the table prior to the referendum!
The sequence of events was bewildering. First, the Greek leaders rejected the creditors' terms and opted for a referendum to decide whether or not they should accept the creditors' terms. Greek citizens voted in favor of rejecting those terms. Then Greece ended up accepting harsher terms than had been on the table prior to the referendum.
To those who say that Greece is a small economy and it doesn't matter whether it stays or leaves the Euro currency, Bill Holter responded that there have been insurance contracts taken out in the form of credit default swaps (CDS) whose notional value is 10 times that of the entire Greek debt to foreign creditors. If Greece were to leave the Euro currency, it would probably also default on this debt. If it were to default, then these credit default swaps would have to be paid upon. The critical point is that it's not clear whether the issuer(s) of these CDSs would have enough capital to be able to pay. That's when there could be another massive financial crisis.
Technically speaking, Greece didn't default on its debt on or about June 30 and none of the CDSs were triggered. But practically speaking, Bill Holter says that it did default because although it did make the required interest payments, it made them later than their due date.
So, the context was one of fear and uncertainty in my opinion. Yet gold responded counter-intuitively and went down ... Why? Time will tell.
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Background: Link to "How does a CDS work?"
Size of Greece's national debt is $300bn. Source. Size of Germany's national debt is over $2tn and is the 3rd highest in the European Union behind UK and Italy. The European nations with the highest absolute national debt amounts are UK, Italy, Germany, and France, each with more than $2tn of debt. Figures are as of Q1 2015. Source.
China stock market bubble burst
The Chinese A-shares stock market as represented by the Shanghai Composite Index hit a seven-year high on June 12. This represented a rise of more than 2.5 times since the low point hit in January 2014 (18 months prior). From June 12, the index went on to fall 35% by July 9; see chart.
Chinese authorities then stepped in to pump up the stock market through draconian measures including banning short-selling, injecting capital by lending to brokers to support shares, and halting trading outright. Shares rose 11% by July 23 only to reverse course and fall again. As of July 31st's close, the Shanghai Composite stood 1% below the low point hit on July 9.
The selloff through July 9 had wiped out $3 trillion in value. Chinese authorities' failed bailout originally required $19.4 billion of capital. Source. This figure had risen to $350 billion by July 31, according to the Financial Times. Correction, Aug. 8, 2015: The $350 billion is incorrect! The Financial Times reported on Aug. 7 that Chinese authorities had already spent $144 billion out of a $322 billion war chest.
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The other major stock market in China is represented by the Shenzhen Composite Index. Chinese shares traded in Shanghai and Shenzen are also known as A-shares. By law, they aren't available to foreigners for purchase. (However, foreigners can set up local operations to buy A-shares; one example is US hedge fund Citadel.)
Commodity prices are falling
In the same week that gold hit a 5-year low (July 19-25), the Financial Times reported on falling commodity prices. The general reasons seem to be lack of demand, too much supply, slowing global growth, and expectations for a rising US dollar.
The fall of crude oil was exasperated due to expectations of Iran supplying oil to the international markets in the aftermath of its historic nuclear accord reached on July 14.
Timeline summary
Sat, June 27: Greece announces plans for a referendum to be held on July 5
Mon, June 29: Greek bank holiday begins
Sun, July 5: Greek referendum is held; Greek citizens reject the creditors' measures
Wed, July 8: Chinese A-shares stock index ends 35% below its peak of June 8
Tues, July 14: Iran reaches historic nuclear accord with G5+1 countries
Sun, July 19: Greek bank holiday ends
Thurs, July 23; Greece agrees to creditors' bailout terms
Fri, July 24; Gold hits a 5-year low
Footnote: I am not implying any causality between events in Greece, China, and commodity prices. I am merely pointing out coincidences.
US stock market prediction
I was looking at some stock charts and couldn't help but notice the coincidence involving the date June 29 which was pointed out in the above timeline. The chart below shows the percentage of stocks in the S&P500 trading above their 200-day moving average. It is a weekly chart and its most recent observation is for the last week in July.
The observation is that for the week starting Monday, June 29, this percentage fell below 60% and hasn't recovered since.
The blue arrow points to the bar for the week of Monday, June 29. Note that in October 2014, when this metric fell through the 60% level, it recovered after two weeks. This hasn't happened since June 29!
Because the x-axis spans two and a half years, we are currently experiencing something that has happened for the first time in two and a half years! What I'm trying to say is that it can't be taken lightly.
The following chart shows the S&P500 itself. This is also a weekly chart. Like the chart above, its most recent observation is for the last week in July.
In contrast to the chart above, this chart doesn't show any deterioration except for a flattening of the uptrend since May.
I look at this chart and I don't worry, but I look at the previous chart and I start worrying ... Due to the fact that the chart above has low points that are spaced 9 months apart (Feb. 2014, Oct, 2014, July 2015), I would speculate that if this pattern were to repeat, we'd have another low point in 9 months which would be ... March 2016.
- Goldman Sachs, one of the most influential banks in commodity trading, cautioned in the week ending July 26 that it expected gold to fall below $1,000.
- Julian Jessop of Capital Economics says that gold may return to levels of about $850 as the Fed moves toward raising interest rates (which is expected for September or December this year). An $850 price level was last seen in 2007.
- Predicting where the gold price may bottom is difficult because gold isn't like metals which have industrial uses such as copper and zinc.
- Gold bugs believe that China is not being truthful about how much gold it has bought. Whereas its official gold holdings stand at 1,658 tonnes, gold bugs believe that it actually holds an amount closer to those of Germany at 3,444 tonnes. (China recently reported an increase of about 600 tonnes which was much less than expected by pundits.)
- Texas-based former stockbroker Bill Holter is bullish on gold. He says, "I can calculate on the back of a napkin that China is buying more gold." He adds that import data support his view. [Someone ought to verify this, please!] "Mathematically, [the world's current build up of debt] is guaranteed [to pop], it is just a question on when."
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Bill Holter publishes here.
By using Google search, Bill Holter led me to Jim Sinclair who led me to Canadian billionaire Eric Sprott, all gold bugs. Eric Sprott said recently, "The demand numbers I’ve seen are way beyond the supply." Source.
Greece exited the Euro almost
It was on the weekend of June 27/28 that Greece surprised the world by announcing that it would hold a referendum and let its citizens decide on whether it should accept its creditors terms. This was instead of Greece reaching an agreement with its creditors before a June-end deadline.
On Sunday, June 28, equity futures around the globe were trading down more than 3%. On Monday, June 29, the S&P500 closed down 2.1% from the previous Friday's close. It was also the first day of a week-long bank holiday in Greece.
The Greek banks ended up remaining closed not for one week as originally announced but for a total of three weeks (through July 19). See timeline here. In the interim, capital controls were imposed (€60/day withdrawal limit; most foreign transfers banned.)
It is in this context that the price of gold hit a 5-year low. Actually, it hit its low in the first week after the Greek banks reopened, with the actual low occurring on Friday, July 24.
On July 23, the Greek parliament approved the agreement reached between Greece and its creditors. The Financial Times reported that Greece swallowed harsher terms than what was on the table prior to the referendum!
The sequence of events was bewildering. First, the Greek leaders rejected the creditors' terms and opted for a referendum to decide whether or not they should accept the creditors' terms. Greek citizens voted in favor of rejecting those terms. Then Greece ended up accepting harsher terms than had been on the table prior to the referendum.
To those who say that Greece is a small economy and it doesn't matter whether it stays or leaves the Euro currency, Bill Holter responded that there have been insurance contracts taken out in the form of credit default swaps (CDS) whose notional value is 10 times that of the entire Greek debt to foreign creditors. If Greece were to leave the Euro currency, it would probably also default on this debt. If it were to default, then these credit default swaps would have to be paid upon. The critical point is that it's not clear whether the issuer(s) of these CDSs would have enough capital to be able to pay. That's when there could be another massive financial crisis.
Technically speaking, Greece didn't default on its debt on or about June 30 and none of the CDSs were triggered. But practically speaking, Bill Holter says that it did default because although it did make the required interest payments, it made them later than their due date.
So, the context was one of fear and uncertainty in my opinion. Yet gold responded counter-intuitively and went down ... Why? Time will tell.
-------------------
Background: Link to "How does a CDS work?"
Size of Greece's national debt is $300bn. Source. Size of Germany's national debt is over $2tn and is the 3rd highest in the European Union behind UK and Italy. The European nations with the highest absolute national debt amounts are UK, Italy, Germany, and France, each with more than $2tn of debt. Figures are as of Q1 2015. Source.
China stock market bubble burst
The Chinese A-shares stock market as represented by the Shanghai Composite Index hit a seven-year high on June 12. This represented a rise of more than 2.5 times since the low point hit in January 2014 (18 months prior). From June 12, the index went on to fall 35% by July 9; see chart.
Chinese authorities then stepped in to pump up the stock market through draconian measures including banning short-selling, injecting capital by lending to brokers to support shares, and halting trading outright. Shares rose 11% by July 23 only to reverse course and fall again. As of July 31st's close, the Shanghai Composite stood 1% below the low point hit on July 9.
The selloff through July 9 had wiped out $3 trillion in value. Chinese authorities' failed bailout originally required $19.4 billion of capital. Source. This figure had risen to $350 billion by July 31, according to the Financial Times. Correction, Aug. 8, 2015: The $350 billion is incorrect! The Financial Times reported on Aug. 7 that Chinese authorities had already spent $144 billion out of a $322 billion war chest.
-------------------
The other major stock market in China is represented by the Shenzhen Composite Index. Chinese shares traded in Shanghai and Shenzen are also known as A-shares. By law, they aren't available to foreigners for purchase. (However, foreigners can set up local operations to buy A-shares; one example is US hedge fund Citadel.)
Commodity prices are falling
In the same week that gold hit a 5-year low (July 19-25), the Financial Times reported on falling commodity prices. The general reasons seem to be lack of demand, too much supply, slowing global growth, and expectations for a rising US dollar.
The fall of crude oil was exasperated due to expectations of Iran supplying oil to the international markets in the aftermath of its historic nuclear accord reached on July 14.
Timeline summary
Sat, June 27: Greece announces plans for a referendum to be held on July 5
Mon, June 29: Greek bank holiday begins
Sun, July 5: Greek referendum is held; Greek citizens reject the creditors' measures
Wed, July 8: Chinese A-shares stock index ends 35% below its peak of June 8
Tues, July 14: Iran reaches historic nuclear accord with G5+1 countries
Sun, July 19: Greek bank holiday ends
Thurs, July 23; Greece agrees to creditors' bailout terms
Fri, July 24; Gold hits a 5-year low
Footnote: I am not implying any causality between events in Greece, China, and commodity prices. I am merely pointing out coincidences.
US stock market prediction
I was looking at some stock charts and couldn't help but notice the coincidence involving the date June 29 which was pointed out in the above timeline. The chart below shows the percentage of stocks in the S&P500 trading above their 200-day moving average. It is a weekly chart and its most recent observation is for the last week in July.
The observation is that for the week starting Monday, June 29, this percentage fell below 60% and hasn't recovered since.
The blue arrow points to the bar for the week of Monday, June 29. Note that in October 2014, when this metric fell through the 60% level, it recovered after two weeks. This hasn't happened since June 29!
Because the x-axis spans two and a half years, we are currently experiencing something that has happened for the first time in two and a half years! What I'm trying to say is that it can't be taken lightly.
The following chart shows the S&P500 itself. This is also a weekly chart. Like the chart above, its most recent observation is for the last week in July.
In contrast to the chart above, this chart doesn't show any deterioration except for a flattening of the uptrend since May.
I look at this chart and I don't worry, but I look at the previous chart and I start worrying ... Due to the fact that the chart above has low points that are spaced 9 months apart (Feb. 2014, Oct, 2014, July 2015), I would speculate that if this pattern were to repeat, we'd have another low point in 9 months which would be ... March 2016.
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