SCT Issue #242
Gold is catching a bid this morning, trading at roughly $1,116 as I pen this issue (5 am EST). It is therefore now above my short-term buy signal at the $1,112 level, and could rally further, as high as $1,150.
It is nothing more than a bounce that will ultimately give way to new record lows. However, with all the currency turmoil now hitting the markets, more on this in a minute, the best course of action is to step aside our bearish gold positions, and then reenter bearish positons on a further rally.
While gold is rallying, stocks are sliding, great for our bearish stock positions. Hold the ProShares UltraShort Dow30 (DXD) … the Direxion Daily S&P 500 Bear 3x ETF (SPXS) and yesterday’s new position, bullish on volatility, the ProShares Ultra VIX Short-Term Futures ETF, symbol UVXY.
Maintain your good till canceled protective sell stops for these positions at $19.25, $15.15 and $20.35, respectively.
Details on exiting the gold positions in a minute. First, the truth about the Chinese yuan.
Many made a big deal about the Chinese yuan and its 1.9% devaluation yesterday. They were shocked, but shouldn’t have been.
In fact, one well-known analyst and his firm now have egg all over their faces. They predicted the yuan would become a reserve currency this October as the IMF, they said, would bless it as a new international currency.
Many others were also surprised by yesterday’s yuan devaluation. They didn’t see it coming. In fact, most pundits and even some of the best professional big name analysts out there have China and its currency all wrong.
Indeed, the yuan has also been a very hot topic among my readers and members. So much so that I can’t even count the number of questions I’ve received over the last several months about the yuan.
Yet all along, I told everyone that all the fear-mongering about the yuan was just that, harem-scarem techniques to capture your attention, without one iota of truth behind the research or the claims.
Fact #1, I said: The yuan can’t possibly dethrone the U.S. dollar as the world’s most important reserve currency. The total of all yuan-based transactions in the world today are roughly only 4% of the total. There is no way something with a market share of 4% can dethrone the dollar.
Fact #2: It is NOT Beijing’s intention to dethrone the dollar. Beijing has almost $4 trillion of reserves based on the value of the greenback. Why would Beijing want to shoot itself in the foot?!
Fact #3: The yuan is simply not ready yet for prime time. That much was recently acknowledged by the IMF and is why the IMF has delayed its decision till at least September of next year.
So then, what’s next for China’s currency? It’s simple:
A. Beijing’s devaluation yesterday is merely debasing the yuan to compete with the devaluations that have already occurred in other Asian currencies. In the Singapore dollar, the Malaysian ringgit, the Indonesian rupiah, the Thai baht and more.
All those currencies have been falling against the dollar for months now, and as I mentioned in my webinar just last week, China doesn’t need a strong currency, it needs a weaker currency.
In addition …
B. Widening the trading band for the yuan is a step the IMF wants to see in order for the yuan to eventually have more international liquidity. The yuan is effectively pegged to the dollar. You cannot have a reserve currency constituent that is fixed. It must be free floating.
Hence, you can expect Beijing to gradually loosen up the trading band for the yuan in the coming months. That may mean it will fall more, but not necessarily. The key is that Beijing must make it a freely tradeable and convertible currency.
C. As to all the talk about a new “Asian financial crisis” similar to the 1997-1998 crisis, I don’t see the parallels.
– Back then, nearly all Asian currencies were fixed currency regimes. So when Thailand moved to float and devalue its currency, it naturally caused a domino effect.
Today, most Asian currencies are free-floating. The one exception is the Hong Kong dollar, which will indeed be forced to lose its peg to the dollar in the not-too-distant future.
– Most Asian governments are in far better fiscal shape than they were in the late 1990s. Most have adequate reserves and rainy-day cushions. Most of their economies are faring well. So I see no risk of an Asian meltdown, at all.
So how will the yuan devaluation impact the markets?
My answer is simply this: It plays right into a sovereign debt crisis.
How? It pushes the U.S. dollar still higher, making dollar denominated debts all over the globe that much harder to repay. That is the core of a sovereign debt crisis: Dollar denominated debts that can’t be repaid and whose burden becomes even heavier to bear as the dollar appreciates in value.
That, in turn, means more deflation.
Right now, we are merely seeing knee-jerk reactions on the markets by investors who wrongly see more inflation as a result, or some sort of Asian financial crisis. That will pass, and the short-term trends will soon realign with the longer-term trends.
In the meantime, we do want to step aside our two bearish gold positions. We will reenter the short side of gold on a further bounce, or on a failure of gold to reach the next level of resistance at the $1,132 level.
I do not recommend playing the long side of gold or any commodities at this time. The bear has a firm grip on them. Any rally is likely to be short-lived, weak, and wrought with downside drafts.
To exit your two bearish gold positions, here are the details:
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For members who own DB Gold Double Short ETN (DZZ) and/or the SPDR Gold Shares December 2015 put options: 1. SELL ALL of your shares in DZZ at the market and cancel your protective sell stop at $6.43. 2. SELL ALL of your SPDR Gold Shares December 2015 put options, strike price 105, symbol GLD151218P00105000, at $3.15, or better, good till canceled. |
Hold all other positions and stay tuned.
Larry
