Chart of the Day: A “Silver Rush” in Chin

By Eric Fry
January 30, 2016

Sometimes, if you can’t get to a party, you’ve got to bring the party to you. This approximate philosophy seems to be inspiring a surge of silver buying by the Chinese.

Since the Chinese government is making it difficult for its citizens to take currency out of the country, many Chinese nationals are bringing a “better currency” into the country. They are buying silver hand over fist.

China’s silver imports recently hit their highest level in four years. Most likely, the Chinese are stepping up their silver purchases as a way to protect themselves from the risk that their currency, the renminbi, will continue to lose value against the U.S. dollar.

During the last five months, the renminbi has fallen more than 5% against the dollar. This loss of value, combined with China’s collapsing property and stock markets, has triggered a massive “capital flight” from China into various offshore assets.

A whopping $1 trillion has fled the country during the last 12 months, according to estimates by Bloomberg Intelligence. That’s about $770 for every man, woman and child in China!

Because so much capital is fleeing the country so quickly, the Chinese government has stepped up its efforts to block the exits.

The laws and regulations that were already on the books limited annual overseas transfers to $50,000 per person. But for many years, wealthy Chinese have used a variety of tactics to maneuver around this limitation.

The government is now making the game much more difficult.

Bloomberg News provided the following insight into the Chinese government’s latest efforts to prevent capital flight:

• Increased scrutiny of transfers overseas – Some Shanghai banks have recently asked their outlets to closely check whether individuals sent money abroad by breaking up foreign currency purchases into smaller transactions and to take punitive action if violations were discovered, according to people familiar with the matter. Each person can send $50,000 abroad annually, so large sums can be transferred by utilizing the bank accounts and quotas of a range of individuals, a tactic known as smurfing.

• Outbound investment quotas frozen – China has suspended new applications under the Renminbi Qualified Domestic Institutional Investor (QDII) program, which allows yuan from the mainland to be used to buy offshore securities denominated in the currency. It has also refrained from granting new quotas for residents to invest in overseas markets via the QDII program.

• UnionPay debit card clampdown – New measures were introduced in December to crack down on illegal China UnionPay card machines, which were suspected of being used to channel funds offshore via fake transactions, most notably in Macau casinos.

• Underground banking clampdown – China busted the nation’s biggest “underground bank,” which handled 410 billion yuan ($62 billion) of illegal foreign exchange transactions, the official People’s Daily reported in November. The Shanghai branch of the State Administration of Foreign Exchange said last week that it will crack down on illegal currency transactions, including underground banking.

Perhaps these new government tactics will slow the exodus of capital over the short term. But capital controls rarely succeed over the long term. To the contrary, they are an ominous warning sign – the reddest of red flags. They announce to the world that it’s time to get local currency out of the country as fast as you can, and then swap that currency for hard assets offshore.

But since that is easier said than done in China, some Chinese nationals are doing the next best thing: They are importing the hard assets from offshore and using their local currency to do it.

So far, the recent surge of Chinese silver buying has not sparked a corresponding bounce in the silver price… at least not yet.

But interestingly, the last time the Chinese ramped up their silver buying was in 2009 and 2010 – several months before the silver price rocketed from $15 an ounce to $50 an ounce.

So if past is prologue, there might be a great big silver bull market heading our way.

Cheers,

Eric J. Fry
For The Non-Dollar Report

Gold Short Term

The NFP report on Friday will most likely be the event of the week for Gold.  

Resistance is the 1130-1138 area and then 1142-1146.  Most important is the uptrend channel and the momentum channel in short term gold is meeting at the 1130-1138 area.  A Friday close above 1143 would put price just above the uptrend channel and open the potential for the momentum channel to continue tracking gold price.  A close below 1115-1117 would take us out of the momentum channel and expose gold to retest the 1090 area.  There's also support at 1101-1109.   The bottom line is things might remain quiet in gold on Wednesday and Thursday in anticipation of the NFP payroll report on Friday morning.  The short term trend remains up.  A close below 1101 would turn the trend neutral.  

Gold Medium Term

Weekly gold arriving at the moving averages (1117 Blue and 1139 Red).  We need two weekly and a MONTHLY CLOSE above both to go from Bearish Medium Term Gold to Neutral.   Neutral is not bullish, but it ain't bearish.  The Dual Yellow trend line's upper end is the 1172-1222 area. Look how there is almost no resistance above the Dual Yellow lines for quite a distance. A monthly close above 1255 would be a significant event.  It takes a monthly close below 1033 in order to extend the bear market lower.  Odds still favor the low is either in Dec 2015 (Armstrong 51.6 month cycle) or March/April 2016 (A Fibonacci 55 months from the high).  So far, December has been the lowest price at 1045.  If the bear market in gold is over, it needs to take out the Dual Yellow trend line on a monthly close for further confirmation.