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Swine Flu and Gold Fever – a Double Outbreak?

After a period of dormancy, could it be gold’s time to shine once again? The market is flashing some fairly clear signs, as Justice explores…

Last week we talked about China’s stealth abandonment of the dollar, and the quiet strategic moves being employed against the United States. We also mentioned “Go,†an ancient game played on a 19×19 board with black and white stones.

In that regard, Taipan Daily reader LBT writes,

Dear Justice:

Superb, as I generally say when writing to you.

I have a question for you: have you ever played “go,” as we call it, or seen it played?

On the surface Go/Wei Chi is a child’s game that can be explained in a couple of minutes. Once you understand how to construct a formation with two eyes that cannot be captured you know enough to dive right in and play.

Beginners almost always scrunch themselves up in a corner and waste enormous points (which are given for territory – empty points – which the other player does not wish to contest OR for men actually captured, usually a far lesser number.) Those of us who’ve been around the board a time or two get aggressive with our outposts on the other side of the board early and fight such small battles as look profitable to us…

Beginners sit there delicately filling in valuable real estate in their attempts to ensure safety, while good players know to spread around counters so that they can guide a small battle for territory over to an area they have staked out in advance.

The real point here is that this can be a very subtle game and the most important thing to look for is patterns. I’m a pretty good player, and I relax my eyes deliberately from time to time and let the board go out of focus. In a sense it is the “forest vs. the trees” thing (usually useless) where what you have to see is that there is an ornamental garden if you have the wit to see it. You cannot concentrate all of the time on individual points or you miss big opportunities.

I suspect that the Chinese are way, way ahead of us in thinking out all of the possibilities and ramifications, and that they will not attack the dollar “for real” until they expect to come out well ahead.

LBT

To answer your question LBT, I have seen the game played but not explored it personally (yet). So many riches in life yet to sample…

You make a great point, too, about the value of relaxing one’s eyes and not getting caught up in the small things. More to say on that, particularly as it relates to trading, in a future Taipan Daily.

China Ups the Ante

In regards to the “great game†that revolves around global currency markets, China unveiled a surprise not-so-subtle move on Friday.

Hu Xiaolian, head of the State Administration of Foreign Exchange, or SAFE, revealed to the world that China holds 76% more gold reserves than previously disclosed. As it turns out, China is sitting on closer to 1,054 tons than 600 tons. This is still a drop in the bucket compared to some $2 trillion worth of total reserves, but the needle is ticking in the right direction.

As I wrote to Safe Haven Investor readers on Friday, “the timing of the disclosure is curious,†further adding the following:

Does China want a higher gold price? In the short run, that’s hard to say. Sometimes a big buyer prefers a temporary lower price, which enables them to get better value on their additional buys.

Clearly, though, this move was intended to boost gold (which it succeeded in doing) and spook the dollar a bit more.

It may be that China was worried about all the loose talk of IMF sales having too much of a negative effect on the yellow metal, and so they wanted to say “Hey, guess what. There’s plenty more buying power in the wings here. Don’t forget that…â€

In some ways, “surprise†developments like these aren’t all that surprising. We can’t know the timing in advance of when a secretive government agency will make an announcement, of course. But we can (and do) recognize that the US dollar has a terminal long-term prognosis.

Whatever China’s hidden intentions in talking up their buys, prospects for a fresh outbreak of “gold fever†look strong here.

As stocks went on a tear in recent weeks, with the junkiest, lowest quality names leading the pack (particularly in the battered and beleaguered financial sector), gold did not break down, instead holding ground at 200-day moving average support.

Also note that GLD – which is big enough now to perhaps be an even more important barometer than gold futures contracts – managed to recently retake the levels above its 50-day EMA, and that all three key moving average levels (the 200, the 100 and the 50) have banded together as support here.

India Lends a Hand

We can further note that key negative factors for gold are easing a bit.

A few weeks ago, in a piece title “What’s Driving Gold and Gold Stocks (Part One),†we said the following in these pages:

India, the “world’s largest gold buyer by a wide margin,†has even stopped importing “for the first time in 10 years,†the Financial Times reports. In February and March India saw zero gold imports, while January imports came in light. Vietnam and Thailand, normally reliable buyers of gold, have also been selling. Stepped-up scrap sales have even put Asia scrap sales at a discount to the standard London quote.

As the seasons change – and festival season picks up – India is returning to its old habits. After virtually “zero†gold imports in February and March, provisional statistics from the Bombay Bullion Association suggest India has imported as much as 30 tons of gold and 60 tons of silver for the month of April thus far.

Spec Rally Running on Fumes?

Another factor weighing in gold’s favor is the real possibility that this speculative rally in “junk†stocks is running on fumes – and that the whole thing could end in tears.

While it’s good to see a number of quality names lifted higher by positive market sentiment, it’s distressing to see so many turkeys flying high too – a sign that the windstorm probably won’t last. What’s more, we are now seeing a rapid unloading of insider shares according to Bloomberg:

Executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market…

While the Standard & Poor’s 500 Index climbed 28 percent from a 12-year low on March 9, CEOs, directors and senior officers at U.S. companies sold $353 million of equities this month, or 8.3 times more than they bought, data compiled by Washington Service, a Bethesda, Maryland-based research firm, show.

Not exactly a shining vote of confidence, that. To the degree that this rally has been fueled by a combination of short squeeze, bogus bank earnings and balance sheet hocus-pocus, the risk of a big downside whoosh is heightened – which further improves the outlook for gold.

And Last but Not Least, Swine Flu

And then, of course, we have the global outbreak of swine flu. If you’ve been scanning the headlines, this is pretty scary stuff.

Here is a list of countries either dealing with confirmed cases of swine flu, testing potential cases, or setting up active quarantine measures thus far: Australia, New Zealand, Israel, France, Spain, the United States (at least 11 confirmed cases), Canada (six cases), of course Mexico (the epicenter), Singapore, Japan, Thailand, Indonesia, Hong Kong, Taiwan, China and Russia. I’ve probably missed a few.

“It’s a bit movie-like, it doesn’t feel real,†an unnamed New Zealand student said, in reference to the quarantine process after getting sick in Mexico.

Let’s just hope it doesn’t get even more “movie-like.†Outbreak and Twelve Monkeys come to mind…

Putting Hollywood aside, it’s too early to panic – but it isn’t too early to start thinking about consequences. We are already getting word that this new swine flu is a sort of hybrid not really seen before. And we know an event like this is potentially far more serious in economic terms than, say, an isolated terrorist attack, because of the degree of global “shutdown†that can occur.

Taking a grimly opportunistic view of things, the threat of escalation on the swine flu front bolsters the gold case in two areas. First as a form of “crisis insurance†– a place to hide when things start looking ugly again – and a second as a doubly renewed form of “printing press insurance,†given the fact that global slowdown brought about by swine flu might give the powers that be even more excuse to pump trillions of paper dollars into the system.

Got gold?

About the Author

Justice Litle is Editorial Director for Taipan Publishing Group. He is also a regular contributor to Taipan Daily, a free investing and trading e-letter, and Editor of Taipan’s Safe Haven Investor and newly introduced service Macro Trader.

Justice has worked with hedge funds, traded equities for a private partnership, written multiple articles for Futures Magazine, been quoted in the Wall Street Journal, sought for market commentary by the likes of Reuters and Dow Jones, made contributions to the book, Trend Following: How Traders Make Millions in Up or Down Markets, and also filled the lead editor of Outstanding Investments, a popular natural resource newsletter.

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