Posted By Isaac Nuriani
Looks like gold has caught fire in 2016, just as we predicted. Following the long correction that climaxed in December, the new year brought in a quick gold rally that, to us, looks like it could be the start of a new bull market. Take a look at the CBOT 100-ounce gold contract: After forming a reverse head-and shoulders in December breaking below $1,050 per ounce, gold closed 2015 around $1,060. The price then explodes in 2016, hitting about $1,110 before a little profit taking left it around $1,090. Our next target is $1,200 to break through the October resistance and establish new support.
Well, what’s pushing gold up? We mentioned previously the troubles that China is causing the rest of the world. And indeed, China’s stock market was an absolute nightmare in the first week of 2016, causing officials to short-circuit trading twice. Now, we think Chinese stocks have earned a short pop, but we also think the real story lies with the Chinese currency, the yuan. According to Barron’s, China is fighting a massive flight of capital out of the country, depressing the value of the yuan and draining China of foreign currency reserves. In fact, those reserves plummeted by $108 billion in December 2015, the biggest monthly plunge since 2003. This is the amount of foreign currency that the Chinese central bank had to spend to keep the yuan from collapse.
Apparently, $930 billion of capital left China in the period of Q2 2014 to Q3
2015, the latest date for which data is available. That, friends, is a HUGE
amount. Finally, China threw in the towel in the first week of 2016 and allowed
the yuan to fall by 1.5 percent. Who knows how far the yuan will drop in 2016?
Needless to say, the falling yuan undermines confidence in the world economy,
especially in emerging countries that depend on China for trade.
As Barron’s put it: “The weakening economy and capital flight from China mean further declines in the yuan, which probably puts further downward pressure on emerging markets and commodity prices. And, in turn, global capital markets are likely to continue to be roiled.”
When confidence in paper money is undermined, our thoughts turn directly to gold,
the traditional safe harbor in a storm. Seems like the rest of the world is
catching on. The time to start accumulating physical gold is right now, early in
what could be a historic bull run.
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