Gold in the markets: which is better charts or fundementals?

It’s amazing the various views and means by which so many try to predict where the gold markets will go and for how long. There is the fundamentals view, which I tend to agree with, charts, moving averages, economic indicators, lucky shoes, and so on. Each one has there own merit, and detractions. And to give you an idea, here is one thought I’ve recently seen.

“When you take a look at gold stocks they also are badly lagging the metal. Even though they made new 52-week highs early in January they underperformed the metal when they did so. This is important, because usually the XAU/gold and HUI/gold ratios lead gold and gold stocks. It is bullish when gold stocks outperform gold and when they both go up and gold stocks lag that is a powerful negative divergence that usually spells some sort of top being made.

I do expect the broad market to continue to rally - and expect that rally to keep a bid under gold stocks and commodities. But once the broad market tops, and I expect this to happen in March, I think we will see a big 25-30% correction in commodities and gold stocks. The Chinese stock market is likely to fall 40-60%! If we get such a correction I look to see the XAU bottom in the 130-145 area.”

Sounds a bit ominous doesn’t it?

Then there are the views I hold. That we know supply will tighten due to the multiple mines that shut down because of the power outages. Those outages are expected to last another month or so. Demand in China and India has consistently been on the rise, but the recent winter storms in China have affected millions. Businesses have shut down and people have been stranded. Thus their demand should decrease for a short period, then spike and normalized.

The U.S. economic outlook is still bleak. Though the Federal Reserve has cut rates dramatically in January that won’t really hit the economy till the 3rd quarter at best. A recession in America is a fact to many people and industry sectors. Oil, though down from January highs remains above year ago levels. And the U.S. stock market is leading the world markets lower, with financials still not done with the mortgage crisis.

Based on my observations, gold continues to be a strong choice. Given that many of the gold miners have pulled back, either through regional difficulties or profit taking. Considering the moves they made in the positive compared to the losses in the broad market a pause is to be expected.

Gold and gold stocks are a hedge versus a weak dollar, bad economic forecasts and weak general stock market movements. For the various gold investments to correct 30%, you would expect several of those factors to improve. At this point there is no indication that it will happen. In fact, once the unpredictable conditions of weather and power are resolved, the obvious expectation is that gold should increase since the other factors look to take several months more to even begin to improve.

Thus the question is what will be correct. Will gold and gold stocks fall into a bear market of their own, pulled down because of chart and moving day averages? Or will the fundamentals of demand and weak economics continue to propel gains made in January.

I’ve heard many arguments for both. And each always has their days when they are proven correct. But considering gold is again at the $900 level, plus my own personal preference to fundamentals, I say the charts will be wrong.

As always time will tell. Keep an eye on when the power comes back on, and the storm recovery is done. I think a spike will hit the gold stocks and the spot prices, and growth will continue till May or a bit later. And I still expect to see $1000 gold spot prices, with a commensurate move in individual gold stocks, long before then.

Chinese stocks may present a buying opportunity

The Dow Jones Index drops 370 points, financial stocks are being hit hard, and the service sector index hit a low not seen since 9/11. That feels bad, and it bodes is for the economy. We all know that, as does the world markets.

"This was certainly an unexpected piece of bad news. The magnitude of the miss below the estimates really got people’s attention," said Michael James, senior equity trader at Wedbush Morgan Securities in Los Angeles.

The FTSE 100 Index lost 158.20 points, Hang Seng index plunged 1,339.24 points, or 5.4 percent, to close the half-day session at 23,469.46. Japan's Nikkei 225 index tumbled 4.7 percent to 13,099.24. And that’s just the immediate reaction.

"It's unbridled pessimism," said Francis Lun, general manager at Fulbright Securities Ltd. in Hong Kong. "Everyone is concentrating on a U.S. recession, but Europe is also looking bad.... We are in for a bear market now."

Now that you’ve had the shock, focus on the positives. For China stocks there are several items that may bode well. Obviously there is the fact that the Olympics will help draw new revenues to hundreds of businesses and industries. It’s a spark to the economy that definitely going to be a cushion regardless of the American economy at the time. But that is a short boost and limited in its scope.

There of course is the news that besides the pressure coming from America in recent weeks, there is a national crisis in the form of winter storms that have hit the lowest temperatures in 100 years.

"In northern China we have quite a good emergency plan to cope with unusual weather conditions. But in southern parts of China, the mechanism and emergency plan to cope with such weather needs to be improved," said head of the Chinese Meteorological Administration, Zheng Guoguang.

In the midst of such gloom and serious causes of concern, and with so few glimmers of upside hope in the near future bears normally rule. But, besides the bears, savvy bull market investors have to be happy. This is a market that in some ways mirrors what I saw as the reaction of some investors after 9/11. While many panicked and sold, a small few searched and picked the sturdiest of industries to get into. Not huge positions all at once, but a piece here and there as the prices went lower and lower.

Now I know I’ve questioned the growth in China for some time. I realize that their may well be limiting factors, and the American Economy ranks high among them. But with world stock market prices getting hit again, European markets being shaky, low interest rates, and the 54 billion Yuan cost of this unforeseen and devastating winter storm, I like the opportunity.

Is this the perfect time? Never, such a thing does not exist. But a smart plan, taking the best companies in fields that are and will be hardest hit shortly, involves taking disaster and world turmoil and turning it into a long-term profit center. While some may look for the quick boost to the service sector, and transportation, I think financials are the key along with mining.

Time will tell if these sectors will end the year up, but considering that by the end of the quarter both should be hit hard it’s attractive to me. But again, that’s only if you think buying in troubled times is a useful part of your overall portfolio plan, and you expect China and world markets to regain some of the strength they have lost.

Will the Chinese markets take the gold medal in 2008?

With the start of 2008 China has had its stock market surge, yet there are some questions. Already the impact of the Olympic games in August are being felt, as the Shanghai Composite Index at 5,272.8 points. While that is a mere 0.21 percent for the day, stocks related to the Olympics as well as Beijing-based and consumption-related stocks recorded gains of up to the 10 percent daily limit.

There is no question that the Olympic games are a source for a surge in any country that is host of the games. And the effect has been seen in 2007 with the 55% gain of the year, even with the technical bear market the stock markets fell into that same year. Expectations are that gains for 2008 will reach 35%, and the IPO market is flush.

But the question of inflation is hardly unheard. In November the CPI number reached 6.9%, which is a level unseen since the last century (1996 to be more exact). This is of course causing some tightening in the financial sector, and many see that sector being held back as a result.

But the Olympics are hardly the only factor affecting the Chinese markets. There is the potential bidding war for China Eastern, that is giving some loft to that entire sector. And Shanghai Diesel Engine is another that has enjoyed the profit from takeover news.

As I’ve mentioned before, many expect the Chinese markets to out perform all of Southeast Asia. The shipbuilding sector has been the target of several analysts, others looking at the exploration and refining of oil. And as mentioned above Chinese investors have placed some $61 billion into the IPO market.

So is this the start of a great year in China? Will there be a surge in that market again this year? Will the bear market rule and become an Usra Major instead of Ursa Minor? And most importantly is it too late to be involved?

My guess would be that the answer is yes and no. Like all things in any stock market, a run in any sector begets more investors jumping in, and some are bound to be top-ticking. But given that fact, the Olympics are still half a year away. The surge in international visitors has yet to hit the nation, and profits from that are yet to be realized.

The service sector has yet to really have the same benefit being projected in other sectors. Obviously inflation will retard some of this gain, and the gain will be anticipated prior to the actual international competition. The IPO markets are an unknown factor, but considering the growth of 270% it can be expected that even more investors will continue to seek out new companies. And as with all new companies the potential to innovate and succeed is impossible to full analyize in the short-term.

No matter the short-term effects of the Olympics, which I expect will dominate news and comments about the Chinese markets this first half of 2008, there are many things influencing China stocks. Most of them are long-term factors, and will have fruition well after the gold medal ceremonies have finished.

I would say, in my opinion, that the really most vital question is what are the financials going to do. With monetary tightening and inflation realities hitting the sector, it’s not the most favored sector. But if China stock markets act like other world stock indexes, they could be the indicator that sets the pace for the year and those to come.

From a soaring Bull to a biting Bear in 30 days

Sometimes markets act swiftly. In America we have seen that since Monday, with the Dow Jones hitting correction territory and just 2 days later now resting up at 13,289. That’s a huge point swing, but when you consider China, it’s not that big a move.

Those that like distressed stocks, and have a feel for international markets may want to take a look. Of course the words of the reputable Warren Buffett should be heeded when he stated investors should be “cautious”. Why is the Chinese stock market in distress and Mr. Buffet advising caution? Because China is going through its own market bubble right now.

While you may not have heard this in the news, China had prices increase 4x in the past year. Beyond impressive growth without question. But the bubble is bursting now with massive recalls and particularly high valuations.

“Shares in the index trade at an average 44 times earnings, according to data compiled by Bloomberg. The MSCI Asia Pacific Index and the Standard & Poor's 500 Index are valued at 17 times profit.”

Because of these pressures China has now officially gone into a bear market having dropped 21% in a single month. And some feel this is not the bottom.

“Yan Ji, an investment manager in Shanghai for HSBC Jintrust Fund Management Co., which oversees the equivalent of about $517 million. ``What we have seen now is only the start.”

So the question is, is this the feeding ground for international bears feasting on shorts as the pressure mounts, or is it an opportunity for savvy bulls picking and choosing their targets? As with any market in turmoil, there is no easy answer.

China is seeking to slow the 11% growth of that nation; Chinese brokerages are being encouraged to invest overseas to the tune of $34 billion. The last bear market lasted 4 years and caused the Chinese market to drop 50%, before rising 5x in its wake.

And some are optimistic, like

“It's far too early to talk about a prolonged bear market as domestic demand is still strong,'' said Leo Gao, who helps manage the equivalent of $2.3 billion at APS Asset Management Ltd. in Shanghai.”

Well overall one thing can truly be said, without risk there is no reward. But to know whether you are leaping without looking is important as well. There is no question that there is money to be made with China stocks. Just make sure you know where you have placed your footing.

**This can be seen at China Stocks Blog where I am a contributing author.**