Gold Sees Selling, China Unpegs Renminbi

Tuesday, June 22, 2010


"It was never my thinking that made me money but my sitting tight." ~Jesse Livermore

Yesterday's large drop in gold was somewhat brutal but it did not break down through any of my stop levels. After leaping out to new highs last week, China's revaluation announcement spawned selling in the precious metal. Quite frankly, at this point I'm trying not to think. Gold formed a very bullish formation on all timeframes and broke out to new all-time highs. If history is any guide, the real party has not yet begun. Perhaps this is healthy action as the retracement has filled some downside gaps and stopped out many weak hands that would have created overhead resistance. The technical and fundamental reasons I entered this trade have not changed, only my P&L has. My stop remains in the $118.80 area on NYSE:GLD and we'll see how the market acts this week.

Chinese renminbiChina Revaluation

China's announcement of its plans to gradually revalue the renminbi is a welcome development. Ultimately, this action is in the best interests of China and the rest of the world. While many were hoping for a one-off large appreciation I do not see a more gradual approach as being a poor decision for all parties. Ideally, China would begin spending their capital account surpluses which would greatly help the global economic recovery and reduce trade imbalances. Yet, that is not to be and we'll have to accept what we can get. Now it is all a matter of how much China allows the yuan to appreciate over time. If we only see 3-5% appreciation over this year there will not be significant impacts on global markets but it is a step in the right direction.

Stock Market

While China's announcement fueled a 2.9% jump in the Shanghai Composite and led to pre-market buying in the US, equities in America faded throughout the day and closed in the red yesterday. After an 8% jump off the early June lows, some selling pressure is not unexpected. I would not be surprised by some more downside in the short-term and I will be actively looking for areas to add to my current longs.

Wade Slome over at Investing Caffeine put together a great post comparing equity markets today to 1998.
What many pundits and media mavens fail to recognize is S&P corporate profits have virtually doubled since 1998 (a historically elevated base), despite market prices stuck in quicksand for a dozen years. What does this say about the valuation of the market when prices go nowhere and profits double? Simple math tells us that all stock market inventory is selling for -50% off (the market multiple has been chopped in half). That’s exactly what we have seen – the June 1998 market multiple (valuation) stood around 27x’s earnings and today’s 2010 earnings estimates imply a multiple of about 13.5 x’s projected profits.
This line of thinking is very convincing to me. I cannot believe Apple (NASDAQ:AAPL) can sell for 23 times trailing earnings. Apple is perhaps the most exciting, innovative company in the world boasting $23 billion in cash and no debt. How can the maker of the iPhone and iPad with a 37% 5-year trailing net income growth rate sell for 17 times projected EPS?

Disclosure: Long GLD, FXI.
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