iCharts Discussions

[vinay28]

[rk_a2003]

Commentary on the gold market from the World Gold Council 19 Apr, 2013
General statement to be attributed to Aram Shishmanian, CEO, World Gold Council:

“It has become increasingly clear over the course of the past week that the fall in the gold price was triggered by speculative traders operating in the futures markets. Their short-term view of generating a trading profit is in stark contrast to the views of long term investors in gold, as evidenced by the massive wave of physical gold buying that began over the weekend and accelerated following Monday’s further decline. The surge in gold purchases is spanning markets from India and China to the US, Japan and Europe. Buyers are viewing this as an opportunity to purchase gold at prices not seen in the past couple of years.

The World Gold Council is uniquely positioned in the gold market to get immediate feedback on market patterns. We are already seeing shortages for bars and coins in Dubai, while premiums in Mumbai are at $26/oz and $6 in Shanghai, indicating that buyers are willing to pay more than current spot prices for the metal.

Clearly the desire to own gold, as an investment and for adornment, has made itself felt in the physical market. Gold operates on the basic economic fundamentals of demand and supply. Our view is that demand is strong while supply remains constrained and that this dynamic ultimately drives the long-term price of the metal”

This is in line with the observation made by Doctor Shash regarding the spike in gold demand in India after price collapse.

Look at the long term gold chart posted by Vinay. It shows that the major appreciation occurred in gold after shunning gold standard of currencies. The major vertical up move occurred along with the introduction of QE’s in USA and monetary easings all over the world.

Due to the flooding of trash paper the only alternatives left for thinking people are land, natural resources and precious metals. Precious metals have a more advantage with abundant liquidity. That’s why all over the world people are rushing for Gold.

Coming back to WGC statement “It has become increasingly clear over the course of the past week that the fall in the gold price was triggered by speculative traders operating in the futures markets”. Well…….Who Are They?

[vinay28]

I feel something dramatic may happen to gold over next year

[rk_a2003]

currency wars and GOLD

"Devaluing a currency is like peeing in bed. It feels good at first, but pretty soon it becomes a real mess.” – A line attributed to a senior official of the Federal Reserve of the United States

Central banks around the world have been on a money printing spree since the start of the financial crisis in late 2008. The Federal Reserve of United States has expanded its balance sheet by 220% since early 2008. The Bank of England has done even better at 350%. The European Central Bank came to the party a little late and has expanded its balance sheet by around 98%.

The Bank of Japan has been rather subdued in its money printing efforts and has expanded its balance sheet only by 30% over the last four years.

But now it seems to be getting ready to join the money printing party. Japan has had a deflationary scenario since 2009, meaning that prices have been falling. The Bank of Japan is now targeting an inflation of 2% and wants to reach the goal at an earliest possible date.

Money printing is an idea which every country can implement. And countries will resort to it more and more in the years to come to protect their exports. In fact countries have already been voicing their concern on a rapidly depreciating yen. As Liam Halligan chief economist at Prosperity Capital Management pointed out in a recent piece “Germany, also, is deeply concerned about the yen’s recent fall and the prospect of further weakness. With an eye on his country’s all-important export sector, Bundesbank president, Jens Weidmann, recently mauled Tokyo’s new affinity for loose money, referring to “alarming infringements” and an “end to central bank autonomy”. Three months back one euro was worth 101 yen. Now its worth around 125 yen. This appreciation of the euro is bound to impact the exports of countries like Germany which use the euro as their currency.

Germany cannot cheapen the euro by simply printing it, like Japan is doing with yen because euro is used as a currency, by 16 other countries. Given that Germany cannot decide unilaterally to go ahead and cheapen the euro by printing it. A little under half of the German GDP comes from exports.

But other countries have no such problems. The Czech Republic is looking to cheapen its currency koruna and Sweden is looking to cheapen the krona. It won’t be surprising that other countries around the world, specially the export oriented economies of South East Asia, soon join the money printing party, in order to ensure that their exports don’t get uncompetitive.

In short, the world is getting ready for a currency war, as countries try and print more and more money to hold the value of their currency against other currencies and thus ensure that their exports remain competitive.

Mervyn King hinted at it when he said “ My concern is that in 2013, what we will see is the growth of actively managed exchange rates as an alternative to the use of domestic monetary policy.” Even George Soros, the famed hedge fund manager, feels that a currency war is the biggest danger facing the global economy. ““I think the biggest danger is … a currency war,” Soros told CNBC.

This might lead to the collapse of the confidence people have in paper money. James Rickards author Currency Wars: The Making of the Next Global Crises feels that the “The biggest risk is the rapid collapse of confidence in paper money. They can’t just keep printing…All major central banks are easing…Eventually so much money will be printed that this will lead to inflation. The endgame is collapse of the international monetary system — sometime sooner than later.”

This is something that Lynn agrees with. As he writes “The more central banks try and manipulate the value of paper money the more investors will grow disillusioned with it. There is only one quasi-currency that nobody tries to devalue — only because they can’t — and that is gold. If central banks engage in a round of competitive devaluations, then the value of any of paper currency measured in gold will only go up.”

Federal Reserve of United States has been lending out gold to banks known as bullion banks which are in turn selling that gold so as to drive down its price. After they have slightly driven down the price they buyback the gold and thus make a profit. This benefits both the bullion banks as well as the Federal Reserve. The bullion bank wants to make money. And the Federal Reserve does not want the price of gold to go up.

If the price of gold goes up, its a reflection of the failure of the policies adopted by the Federal Reserve to get the American economy up and running again."

[vinay28]

RK, here's something interesting. For decades inflation went down when unemployment rose. Not since last year after paper printing started, after which both are falling. So probably the ploy of printing has helped. But how long?

By the way, 16 million ounces of gold were shorted last week.

[pkholla]

I subscribe to "5 minute wrapup" which comes from N Pt, Bombay. Here's something interesting concerning Warren Buffet!
Corporate profits as % of GDP:
1999: up until this year, we always thought that Warren Buffett was all about picking the right stocks and focusing on individual companies. But then something unusual happened. He, perhaps for the first time ever, came out in the open with his view on the general level of stock prices. And we are quite glad he did that because it led us to a very important ratio. What this ratio does is it measures the portion of a nation's GDP that ends up every year with the shareholders of American business. In other words, what is known as the corporate profits to GDP ratio.

The fact that Buffett uses this ratio to arrive at his views on the general market value does make it worth looking at. In fact, it is not just Buffett who finds this ratio of great practical utility. Jeremy Grantham, another famous value investor, also swears by it. And the reasons are not difficult to find. The nation's GDP should be carved up in such a way that all the stake holders viz. the Government, employees and shareholders who are entitled to a share of it are made better off. If shareholders end up getting more and more share of GDP every year, then there will come a point where either the Government or employees will intervene and make the profits come back to its long term mean. Besides, higher profits always attract competition and hence, this is another factor that will help in keeping profit margins down.

Thus, with these corrective mechanisms in place, is it any wonder that Jeremy Grantham calls profit margins the most mean-reverting series in finance. There's enough data to back these claims up. On a long term basis, corporate profits as a percentage of GDP in US have stayed remarkably consistent at around the 6% of GDP mark. There have been times when it has gone lower but has recovered lost ground in subsequent years. And there have been occasions when it has gone higher only to fall back over the next few years. As per reports, the present level of profits in US is around 70% higher than the historical average. And a lot of experts believe this is the main reason why US stocks would decline in the next few years.

Thus, in conclusion, using only market PE ratios to understand where markets are headed is a wrong way to approach the whole thing. Efforts also need to be made to understand where profit margins stand. If they are lower than historical averages there are chances that markets are attractive even if PE seems a bit elevated and vice versa. In fact, analysing whether profit margins of an individual company are below or above long term averages can also turn out to be an important indicator other than the PE ratio. Therefore, it's time you start you start taking seriously this simple yet very useful ratio if you haven't already.

[rk_a2003]

• Nifty Spot closed above 5938 in weekly chart. Though validation is yet to come...a bullish signal.

• Nifty monthly chart formed an ascending triangle which is a trend continuation bullish chart pattern.

• Nifty daily chart formed a flag pattern with a target above 6100.

• Reliance formed a bullish fusion indicating a target around 960 (CMP around 800)

• American markets at record Highs.

• MNC’s declaring their confidence with Indian growth story loud and clear by pumping in Billions.

What should we read from these?!

[apka]

add one more RK, to give a longterm breakout of all time high...we tested the long term support 5450 zone and gave sharp reversal.

[vinay28]

[rk_a2003]

We may add the points raised by Apka and Vinay.I just compiled all the signals posted in various threads of Icharts forum that too readily available. Due to that limitation I missed Vinay posts.

However it is apparent that Technicals are Bullishly poised. But flip side of the coin always does exist.

Currency wars, No real recovery in fundamentals of the world economy, Political uncertainties in India are few (not exhaustive.).The adage “sell in May and Go away” is always like a hanging sword on bullishness.

We can be certain about one thing …As of now Bulls are in command and may continue their hold for some more time though it’s not impossible for bears to turn the tables.

[vinay28]

W.r.t. to previous few posts by rk, apka and me, I am penning some thoughts. These should be read along with the previous posts.

1. To begin with, various TA indicators such patterns, levels, etc. and fundamental/psychological aspects seem to be indicating higher levels to come. They vary from 6290, 6600, 6900/7000, 8638, 9100/9400 and finally 15750 with target periods starting from June this year to end 2015/early 2016. How far this will happen and whether it will be a smooth or rough ride will depend on many factors, some of which are given below.

2. In immediate short term, market seems to have entered a parabolic phase, the phase after euphoria and it may last about 30-40 working days. As market keeps going up much to the disbelief of investors, professional traders will get ready to get out near the "top". This mass selling to book profits around the same time starts a crash.

3. Market always moves above/below the median, which varies and is normally considered as 200 dma. How far the market collapses will depend upon how far above it goes above 200 dma. As "easy money" starts drying out, we may see a violent downmove as forces of regression to the median break the parabola. This is how a run-away rally terminates and it could wipe out the entire immediate rally we saw over the past many months and that means levels anywhere from 5500 to 4500. The first sign will most probably come from US, when Fed tries to cut down on QE to bring some sanctity to asset prices.

4. Global economies are threatening to spiral out of control as multiple bubbles form, as I had posted some days ago. Let's see some of the actual and likely indicators that MAY lead to chaos.

a. Equity market got the boost after QEs and US paper fell 60% over long term and 20% in recent times. Crash in Gold and other commodities led to further rally in equity markets as funds got transferred to them. Also, the boost from Japan and Korea added fuel and equity markets went up further. However, global economies entered unchartered territories after money printing began and picked up speed and as markets keep making new highs, any benchmark reference vanishes.

b. Nifty reacted over 600 points when less than 1B$ was taken out in early 2013. This shows that any minor shock can cause a turmoil as much more money is taken out. But market movements are short term while global problems are long term and we will never know what is going to happen. As Michael Gayed wrote in his recent report "What is disturbing here is the message the market is giving if inflation expectations do not converge with the level of the stock market. If after all of this monetary action expectations are still faltering for reflation, then something far deeper may be underway which we might only understand with hindsight.”

c. Marc Faber said recently that markets may react 20% now and 50% later and global societies may collapse. Fortunately, due to India's relatively lesser linking with global economies (this is mainy because we haven't been able to embrace global methods and styles easily, thanks to our conservatism, lethargy, etc.), India may be shielded to some extent, as it happened after 2008 crisis. The most important and strongest saviours in India are its ancient culture of savings, domestic consumption and young and large workforce i.e. demograhic advantages.

d. Indian policies, being very slow to get implemented, have resulted in substantial delays in investments and boost to employment. Just as an example, mining sector is lagging far behind e.g. no gold is being mined when it is the most vital commodity.

e. As I had posted earlier, traditionally, inflation always moved opposite to unemployement in global economies. With QE, they are moving together, giving belief to some that QE was the right thing to do. Only time will tell us the hard truth.

f. A new high in nifty, if ithappens, will be in price only. We will still be 30% lower in real value.

g. As commodities, particularly oil, crash, India will benefit the most. Even if sales don't rise, reducing costs will increase margins and also lower the prices of goods leading to drop in inflation. If this encourages RBI to cut rates further, costs will fall more and additional funds will be available for expansion and investments.

h. The situation in global economy can be best seen by Unilever's decision to invest over 5B$ in HUL. Since they won't sell those shares, they will only get a 2.5% return in dividend yield and, yet, they are happy with that.

g. If and when equity markets crash, funds will get shifted to commodities, which will give much more returns than equity markets, commodities being always scarce.

So if such a crash does occur, when is the likely period. I would like to bet around 8th July. Hopefully, India being insulated to some extent, we may not have to stand in breadlines or beg.

The above post may appear to be disjointed but that's because I have typed as the thoughts came to me and I don't have the patience to arrange them properly.

Comments and suggestions/additions are welcome.

Finally, the intention is NOT to spread panic but to make all those, who are interested, aware of the various possibilities in future.

[rk_a2003]

Vinay,

My Initial response is ..... 'A BRILIANT POST'.
Further comments will follow.

[vinay28]

[rk_a2003]

Vinay,

It appears for me that Indian markets may not correct in a meaningful way till they reach new highs. As you said in short term market may remain in Parabolic phase for 30 to 40 trading days ( still going up ).You may observe that US markets and recently Japanese markets moving in a way giving an impression that markets can move only in one direction.

I agree with you that markets will come down violently whenever the cutting of steroid dose happens. But Uncle Sam is aware of this fact better than us and will try to do it in a stealthy way.

Even market may collapse with the burst of multiple bubbles that are being sustained/ formed during easing’s.

“Marc Faber said recently that markets may react 20% now and 50% later and global societies may collapse. Fortunately, due to India's relatively lesser linking with global economies (this is mainy because we haven't been able to embrace global methods and styles easily, thanks to our conservatism, lethargy, etc.), India may be shielded to some extent, as it happened after 2008 crisis. The most important and strongest saviours in India are its ancient culture of savings, domestic consumption and young and large workforce i.e. demograhic advantages.”

I seriously doubt this ….Due to heavy dependence of FII money it may not happen unless otherwise the investment culture of India go through a sea change. The recent studies revealed that India is getting transformed to spending culture from savings culture (westernization).Whether it is good or bad is another discussion.

Crashes are imminent but timing/controlling them is impossible even to market makers / governments. They may control short term movements. But when the internal dynamics of economic engine (governed by demand supply principles) unleashes its ugly face they too are swiped out by that gigantic force and survive only to attempt a recovery at a later stage. History declared it time and again.

[vinay28]

yes rk, but you saw how fast gold fell just after funds started advising investment in it and so will equity markets, whenever that happens, soon or after 6300/500/900 whatever.

Marc Faber sold gold heavily before its fall. Remember it was Nomura who first started selling in India in late 2007 and then Edleweiss. Now the game of circular rotation (musical chairs) of trasnferring assets from one FII to another will begin if not already begun.