Here is what top Citi analyst Fitzpatrick had to say in his latest report, along with 7 powerful charts:  Weakness in Chinese Iron Ore Imports, weakness in Chinese Asset markets, a bullish USD, USDCNY at the lows, a cheap Gold price, how are they linked and what could it mean?  These charts may help... 

The setups (on the above chart) clearly indicate a move lower by the tune of 9%-11% and at a time when Chinese asset markets are looking vulnerable.

Posted a bearish key day yesterday and is making lower lows for this trend.  The next decent support levels are at 2,138-2,145 (see chart above).

The bearish indications on the Chinese Iron Ore imports chart and the Shanghai Composite (as well as the other equity indices shown) seem to be consistent according to the overlay above.

These worrying developments come at a time when USDCNY (US dollar vs Chinese yuan) is at or near the trend lows in a general USD bullish environment (see monthly US dollar chart below).

Bullish outside month for February (noted above).

(The US dollar) has started to accelerate higher after the break of the double bottom neckline.  This is exactly what happened last year and the year before.  A rally to above 84 is expected here (on the USDX - see chart above).

So could USDCNY (see chart below) stop going down in this market?

If so it may be an interesting dynamic for Gold (see chart below showing gold priced in both US dollars & yen).

For the 3rd time since December 2011 the price of Gold in CNY terms (Chinese yuan) has traded down into the Gold/CNY range of 9,730-9,770.  The first time was 29 Dec 2011; the second was 16 May 2012 and more recently 20 Feb 2013.  Gold in USD terms hit its low on 29 Dec 2011, 16 May 2012, and more recently 21 Feb 2013.

In all 3 instances, coincidentally, there was a “faltering” in the move lower in USDCNY at the same time as Gold in CNY terms and consequently Gold in USD terms hit a low and surged higher.  USDCNY stops going down....USD reserves build up???  USD reserves diversified into Gold??? ... Gold goes up in price in the following months.

In the 2 prior instances we saw Gold in CNY terms rally approximately 15% in on average 3 months (2 months in the first instance and 4 months in the second).  In the first instance USDCNY remained unchanged during this period and in the second instance it rose about 1%.  So overall, on average Gold in CNY terms rallied 15% in 3 months and USDCNY rose 0.5%.  What would we see this time if that same dynamic were to re-occur?

We would see Gold/CNY at around 11,220 and USDCNY around 6.25. Put these numbers together and you end up with a Gold/USD level around $1,795 by May-July 2013 which is right in the middle of the major resistance level of $1,790-1,800. We continue to believe not only will we test this level but ultimately break above it.

A break through this range (Weekly close) would extend the target for Gold towards $2,050....

Continue reading the Tom Fitzpatrick piece below...


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To sum up:

There are clear indications that Chinese asset markets are likely to post further losses over the coming weeks.  In addition to the weakness seen on the Shanghai Composite and Property indices, we see a setup that warns of a significant fall in Chinese imports of Iron Ore. 

These worrying developments are taking place against a backdrop of a rising USD generally but, at least until now, a falling or low USDCNY. 

When bringing these together, we believe we could be seeing a dynamic whereby financial market and economic conditions in China stop USDCNY from falling, lead to more USD diversification as a consequence and thereby provide a strong bid in the market for Gold. 

We will of course have to wait and see if these building blocks follow through but our growing conviction at this stage is that the lows in Gold may already be in place.”

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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Eric King

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