Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

Stock Market, Iron Ore, Bitcoin – Is Silver Next for Chinese Momentum Investors?

Stock-Markets / Financial Markets 2016 Jun 16, 2016 - 05:41 PM GMT

By: John_Lee

Stock-Markets

The roulette game all started in the fall of 2014, about 2 years after Chairman Xi Jinping came to power and became the General Secretary of the Communist Party of China.

Xi Jinping had campaigned for socialist economic reform, including a sweeping anti-corruption drive, cutting excess production capacity, tightening of housing credit, and clamping down on gaming in Macau. Public feedback was initially positive. However, largely as a result of those policies, Beijing was facing an increasingly grim economic growth outlook which was the worst in more than two decades*.


Manufacturing activity in China slowed along with the global economy and the construction sector stagnated.

*Source: Tradingeconomics.com

In late 2014, the light bulb came on – someone in the higher echelon ranks thought the stock market could be a penicillin to the economic and social malaise. The stock market is easily accessible to the public and can serve to fill/occupy their free time. A rising stock market provides a desirable savings vehicle (as opposed to low yield bonds), enables listed companies to raise capital and invest, while local governments and banks can piggy-back on the taxes and fees generated.

As reported by China Daily Asia on September 5, 2014:

“State-run media in China are trying to do something the securities industry has failed to accomplish for much of the past three years: get the world's biggest population to buy more stocks.

The Xinhua News Agency published at least eight articles this week advocating equity investing after similar stories appeared in the People's Daily newspaper and on State-run television last month, part of what Everbright Securities Co said is an increased government push to bolster the market. Authorities have also cut trading fees, made it cheaper to open new accounts and organized investor presentations by the biggest listed banks…”[1]

[1] “State media campaign aimed at getting investors to buy equities” China Daily Asia (September 5, 2014).

The banks started margin lending, a practice that’s has been prohibited since 2007.

The results speaks for themselves:

Source: Stockcharts.com

In the aftermath, the government stepped in and since July 2015 purchased stocks, banned short selling, banned IPOs, and restricted insider selling. All this did was drive speculators away from the market with volumes collapsing.

In early 2016, as Chinese economic growth and fundamentals continued to worsen, the government turned back to what had worked during the 2009 slump: aggressive lending in the property and infrastructure sectors in Q1 2016 provided relief, and revived the housing market and construction industry. It also sparked speculation away from the stock market and into the iron ore/steel commodity sector.

According to an article in the Financial Times:

“The commodities futures market is the most equal in China,” avows one successful trader, before admitting to one drawback: “It’s difficult to meet women.”[2]

[2] “Chinese retail investors throw global commodities into a tailspin” Financial Times (May 6, 2016).

Trading commodities in China — also the world’s biggest consumer of raw materials — is relatively straightforward.

To set up a commodity futures brokerage account in China, an individual needs to provide their identity, in some cases with a video verification, and bank details. A deposit is needed to start trading.

Morgan Stanley estimates 160,000 new accounts were set up online between July 2015 and February 2016. Individual investors tend to be most active when markets are rising, and have dominated past rallies in Chinese futures.

The following chart speaks to Chinese investment speculation:

Source: Business Insider Australia

According to an article published by Business Insider Australia on March 9:

“…the equivalent of 977 million tonnes were traded on the Dalian exchange on Wednesday [March 9, 2016]. Not only was it the highest daily turnover on record, it exceeded the entire amount of physical iron ore imported by China over the past year.

In the 12 months to February, China imported a total of 962.6 million tonnes of an iron ore, the largest year-on-year total on record.

If the level of turnover recorded in Dalian futures on Wednesday was to be replicated over the course of any one typical trading year, it would equate to around 240 billion tonnes of ore.”[3]

[3] “China is becoming a nation of iron ore traders” Business Insider Australia (March 9, 2016).

The annual world production of iron ore was 3.22 billion tonnes in 2014, according to Wikipedia.

The government stepped in, and since May, has raised margin requirements, increased trading fees, and imposed daily movement limits. Excessive speculation on property and commodity sectors, and the undesired restarting of marginal iron ore mines and steel mills have prompted the government to issue a warning on the state-owned People's Daily which said, on Monday, May 9, that China's economic trend will be "L-shaped", rather than "U-shaped", and definitely not "V-shaped". Speculators promptly retreated from the iron ore market resulting in crashing price and volume.

The following chart shows where speculators turned to:


Source: Investing.com

According to a Bitcoin Magazine article dated May 31, 2016:

“Huobi and OKCoin, the two largest Chinese exchanges that now account for some 92 percent of Bitcoin global trading by (self-reported) volume, both reported almost double the usual trading volume over the past weekend. BTCC, China's third largest exchange, also reported a surge in bitcoin trading volume, setting a new record on its Pro Exchange.”[4]

[4] J. Williams, “Bitcoin Price Soars as Chinese Investors Look for Safe Haven From Devaluation and Capital Controls” Bitcoin Magazine (May 31, 2016).

Huobi’s CEO, Leon Li said that: “More and more Chinese investors and their hot money need a new investment market, and a convenient alternative investment like Bitcoin is easy to be accepted by the traders.”[5]

[5] Ibid.

Given its impossible to curb bitcoin trading, and with limited bitcoin supply, I would not be surprised at all if Bitcoin approach US$1,000+/BTC in the near term.

Curiously, if a crypto-currency without intrinsic value can muster such popularity, why not speculate on gold and silver? Particularly silver, as it stands out as a “poor man’s gold”, ideal for action seeking, trigger-happy Chinese investors.

Indeed, open interest in silver on the Shanghai Futures Exchange has been steadily increasing this year, with open interest now roughly equal and equivalent in size to that of COMEX.

Shanghai Futures Exchange Silver contract open interest:

Source: http://www.shfe.com.cn

The contract size is 15kg, roughly 500oz, or 1/10 of the COMEX silver contract size (5,000 oz). The open interest ballooned from less than 200,000 contracts in 2012 to over 600,000 since April 2016.

COMEX silver open interest (‘000):

Source: www.goldchartsrus.com

What is the take-away?

1. The world is welcoming a new class of investors numbering in the tens of millions with hundreds of billions in speculative dollars.

2. Those investors may prefer metals over stocks and bonds.

3. When those finicky investors arrive, they will create a torrential wave.

They may not arrive at silver this month or the next, but I soon suspect they will buy into this compelling, easy-to-understand investment choice. I own physical silver and manage a company engaged in silver exploration.

Source: Investing.com

Silver traded today at 18 months high.

John Lee, CFA
Executive Chairman, Prophecy Development Corp.

jlee@prophecydev.com

John Lee, CFA is an accredited investor with over 2 decades of investing experience in metals and mining equities. Mr. Lee joined Prophecy Development Corp (www.prophecydev.com) in 2009 as the Company's Chairman. Under John Lee's leadership, Prophecy raised over $100 million through Toronto Stock Exchange and acquired a portfolio of silver assets in Bolivia, coal assets in Mongolia, and a Titanium project in Canada. John Lee is a Rice University graduate with degrees in economics and engineering.

About Prophecy Development Corp.

Prophecy Development Corp. is a Toronto Stock Exchange-listed (TSX: PCY) Canadian company focusing on mining and energy projects in Mongolia, Bolivia and Canada. Further information on Prophecy can be found at www.prophecydev.com.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules