Gold’s Death Cross is a buy signal for China

By Economics
The Telegraph, UK
Last updated: February 21st, 2013

Gold price has dropped below $1,600 for first time in six months

It is a treacherous moment for gold bugs.

The first whiff of future tightening from the US Federal Reserve has sent bullion into a nose-dive, triggering a much-feared “Death’s Cross” sell signal on gold futures.

Gold has dropped by over $100 an ounce in ten days, touching $1556 this morning. The HUI index of gold mining stocks broke down weeks ago – as so often leading gold itself by a few weeks – and has already crashed to levels last seen in 2009.

Goldman Sachs has cut its long-term forecast to $1,200. Credit Suisse and UBS are bearish.

Citigroup says the great bull market of the last 12 years is over. The “long cycle” has peaked. Economic recovery has yanked away the key support. So long as there are no big “street riots” this year, investors will stop buying precious metals as Armaggedon insurance and rotate instead into stocks that generate income. Such at least is the argument.

This is more of less what the market would look like and feel like if the gold rally really were to fizzle out, leaving behind an army of small investors who joined the party late and face deepening losses for twenty years – as they did from 1981 to 1999.

If it were true that the Fed is preparing to unwind QE, I would agree – up to a point – that gold faces a nasty squall. But all we had from the minutes was a comment that an undisclosed number of FOMC voters fear inflation and financial bubbles and think the Fed should stand ready to cut back on bond purchases earlier than thought.

How many times before have we heard “exit talk” from Fed hawks? We know who they are. They make a lot of noise. They are routinely ignored. The policy is dictated by the Fed Board and by Ben Bernanke, and there is little sign yet that the board is about to turn.

All the indications point the other way. Bernanke is targeting 6.5pc unemployment, and probably targeting nominal GDP growth of 4pc to 5pc as well.

The US faces fiscal tightening equal to 2pc of GDP this year at best. It is hard to see what is going to offset this. There is a snowball’s chance in hell that economic expansion will be strong enough in 2013 to force Fed tightening.

As for Japan – still the world’s biggest creditor – it has imposed a new policy mandate on the BoJ that implies massive easing over the next year.

The world economy as a whole is still in the grip of a deflationary vice. The global savings rate is still rising to fresh records above 24pc each year.

There is still a glut of capital sloshing around (and ready to go into gold) and a dearth of consumption. The overhang of excess capacity in global manufacturing is still there.

China’s investment is still running at 50pc of GDP, and its consumption is just 36pc, the most distorted economy in modern history.

The international trading system is still out of kilter. Globalisation is still going haywire and that is the underlying cause of the global crisis.

We remain in a 1930s slump. Until this is overcome it is a fair bet that the Anglo-Saxon central banks and their OECD allies (basically everybody except Frankfurt) will stay uber-loose to mitigate the damage.

The world’s policy-making elites know this, which is why central banks bought more gold last year than at any time since 1964. Turkey bought 164 tonnes, Russia bought 75 tonnes. Brazil, Korea, the Philippines, Kazakhstan, Iraq, Mexico, Paraguay, and others all added to their gold reserves.

The Chinese don’t declare gold purchases, but it is an open secret that are buying on every dip, as they have to do merely to keep the proportion stable at 2pc of their $3.3 trillion reserves. Chinese managers at SAFE must be licking their chops at this week’s chatter about a Death’s Cross.

I might add that China would have to buy vast amounts of gold to raise the share to 10pc, a figure mooted by some officials in Beijing.

Until the EMU debt crisis China was still willing to invest most of its fresh reserves in euro debt to diversify away from the dollar. Three years of incompetent crisis management – and no real solution in sight even today – have punctured any illusion in Beijing that monetary union is a sound undertaking.

Jin Zhongxia, head of the central bank’s research institute, said in an OMFIF paper this week that: “the debt crisis in the euro area has demonstrated the structural weakness of this currency.” Indeed.

Yes, the Chinese like the dollar again, but they already have a lot of dollars. They don’t have much gold compared to their peers.

So hold your nerve. The reality is that we have been moving for several years to an informal Gold Standard in which gold takes its place once again as a central store of value – a currency of sorts – in the mix of sovereign reserves.

The reason is obvious. The West is crippled by debt, and so is Japan. Governments are likely to seek an easy way out in the end. The rising reserve powers of Asia know this perfectly well.

As for the Death’s Cross – when the 50-day moving average falls below the 200-day average – it has not actually happened. It occurs only if the 200-day line is declining. This is not yet the case. As you can see below, the line is rising very slightly. That makes it a “Dark Cross”.

Here is a table of what happened in the months after each Dark Cross on the S&P Composite for much of the last century (courtesy of Ron Griess at

Technical patterns can be very powerful but this is not one of them. The Dark Cross trigger offered no meaningful signal on the S&P Composite. Why should gold be any different?

Trust your analytical judgement, not some Voodoo gobbledy gook.

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