Long gold, short China is the winning trade so far this year
So far in 2014 that has been the winning trade. Gold is sharply up, shares in Shanghai are tumbling.
Actually the Shanghai Composite Index is 60 per cent off its high and has been falling for several years. Gold took a break from its 13-year bull market last year but remains in an uptrend. However, both markets could be set for strong movements this year, albeit in opposite directions.
China’s black economy
When ArabianMoney visited China last April we came back warning of hyperinflation and a nation choking on its own pollution (click here). These are the classic symptoms of an overheating economy. Perhap this time is different, but then as our own private circulation newsletter pointed out to its subscribers things never are different in economic cycles
The Asia Confidential newsletter this month recommends shorting Australian banks, the Chinese yuan, Fortescue Metals and the Australian dollar. It reckons these are better short positions than the Shanghai Composite whose large fall restricts the size of further down movements.
On gold we have never seen analysts’s opinions turn as fast as they have in the past week. Of the fifteen analysts surveyed by Bloomberg for the week ahead only two bears remain. Suddenly everybody who said gold was a slam dunk sell has reversed their position.
What’s happening now is a short covering rally in gold. Physical demand has continued to be very robust although it was showing signs of slowing at the end of last year due to falling prices.