The Case for Hong Kong Stocks

This week, Marc Faber came in with a new recommendation. He is advising investors to invest in Hong Kong stocks as we can see in this interview with CNBC. The reason for that is because we see a technical breakout on the upside for China. As a result also the Hong Kong stock market is up. See chart of the Hang Seng Index below from Google Finance.

Now why is China doing so well? I have already hinted on that in this article. Basically, we see many signs of a recovery in China. First off, the PMI had surged to 52 after several months if not years of decline. A surging PMI indicates that GDP growth is accelerating. And the evidence of an accelerated growth in GDP can also be seen in the Chinese power consumption numbers (chart below created by Correlation Economics). As our correlation shows, the rising power consumption numbers go hand in hand with GDP growth.

Next on, this China GDP growth translates itself into a positive development in the commodities market. The zinc and copper prices for example have bottomed out just recently. Also China and Hong Kong real estate have been bottoming out. I have been recommending Tai Cheung Holdings here, which has seen a nice 10% return.

To put some more evidence on display, we can see that the CRB Commodity index has seen a surge since the start of 2014, indicating a recovery in commodity prices. See chart below from Bloomberg.

And last but certainly not least we have a very important development in the currency market. Not only has the Chinese yuan stopped dropping against the U.S. dollar. The Hong Kong dollar is said to finally de-peg from the U.S. dollar, which will boost Hong Kong stocks even more.

If U.S. investors want to buy Hong Kong stocks, I recommend Hang Seng Bank (HSNGY), because this bank is based in Hong Kong and is highly correlated to the Hang Seng Index. And while you wait for the rise, you get to be paid a handsome dividend of 4%.

China Gold Imports From Hong Kong Drop In January 2014

Although China gross gold imports in January fell, the net imports stayed relatively flat. The ratio net to gross gold imports stayed strong.

What people don’t know is that the high lunar new year demand is still to be felt in the coming months as the SGE vault needs to get replenished.

So I expect the trend to rise, not fall.

2013 A Magnificent Year For China Gold Imports

In 2013, China imported net 1140 tonnes of gold from Hong Kong. Which is a huge increase (110%) from the 532 tonnes imported in 2012. Other than Hong Kong, China also imported approximately 420 tonnes from other countries. So total gold import to China is around 1600 tonnes. If gold production ex China is around 2300 tonnes, then China imports almost all the gold that the world produces (ex China).

The gold price went from $1700/ounce (2012) to $1300/ounce (2013) on average. That’s a decrease of 25%. So a 25% drop in gold price makes the Chinese buy double as much gold. If the gold price were to drop another 25% to $1000/ounce, then China would import 3200 tonnes a year which exceeds global mine supply of 2300 tonnes (ex China). This is of course not sustainable and that’s why gold can’t go to $1000/ounce. It’s virtually impossible.

Do as Marc Faber says and buy the junior gold mines GDXJ (cfr. Barron’s Roundtable).

Comparing the China Gold Imports from Hong Kong Vs. Shanghai Delivery SGE

Let’s compare the two charts. The first one is the amount of gold deliveries to Shanghai gold exchange, or equal to the amount of gold withdrawn from the Shanghai Gold Exchange Vaults, which can be accessed here. The SGE withdrawal numbers in chart 1 is equal to Chinese imports and Chinese mine supply and is equal to Chinese demand for gold because all the gold is sold through the SGE. Note that January and December are the best months, because the Chinese have New Year in February.

Chart 1: SGE deliveries (original post) (Courtesy of Koos Janse, In Gold We Trust)

The second chart are the China gold imports.

Chart 2: China Net Imports from Hong Kong

Now let’s put them together. What do you see?

Chart 3: Chart 1 + Chart 2

First of all, the amount of gold withdrawn from the SGE is always higher than the net imports from Hong Kong to China. Chart 1 x 4 > Chart 2. That’s because SGE covers imports and Chinese mine supply.

Second, both charts go up in time, which means Chinese increasing demand is real. You can even predict what the Chinese gold imports from Hong Kong will be, just by looking at the weekly numbers from SGE.

Third, the SGE numbers are approaching world mine supply (yellow blocks), which means the Chinese are buying up all the gold that is produced in the world at this moment. The only way the Chinese can get a hold of this gold is by buying it from someone who is selling (aka The West).

Fourth, if you look at the imports as a ratio of SGE deliveries, the Chinese are importing more and more gold instead of producing it. A few years ago they only imported 10 tonnes a month on a SGE delivery of 60 tonnes a month. Now they are importing 100 tonnes a month on a SGE delivery of 160 tonnes a month. That’s an increase from 15% to 60%.

Fifth, now we come to the real interesting part. If we shift the two charts 4 months from each other. Then we see a perfect correlation. It means that when the SGE deliveries go up (Chinese demand goes up), then China needs to import more gold a few months later (imports from Hong Kong go up). The lag is about 4 months. This means we have a leading indicator for China gold imports from Hong Kong. I’m not sure about this correlation yet, we’ll see when we get more data in the following year. But it looks promising. That also means you should follow the SGE gold deliveries rather than following the China gold imports from Hong Kong. (Edit: correlation confirmed by Koos Jansen)

Chart 4: Chart 1 + Chart 2 Shifted 4 Months

Sixth, now it becomes even more interesting. Whenever the volume of delivered gold at the SGE goes up, the premium between Shanghai and London goes up. See Chart 5 peaks in June and December which coincide with the peaks from Chart 1. This also means that you can monitor daily the premiums on Shanghai and then predict the weekly delivered gold at the SGE.

Chart 5: Gold Premium Shanghai/London

Let’s recapitulate: In December, we see the gold premiums spike to 1.5%, which means there is a lot of delivery at the SGE (flowing out of GLD), which means Chinese gold demand is going up and that means that 4 months later we will see higher gold imports from Hong Kong.

China Gold Imports From Hong Kong Drop in November

According to the latest data here, November wasn’t a good month for China gold imports.

Gross imports turned back to their average. Net imports declined a lot more. Although these numbers are lower than usual, they are still higher than what we saw in pre-2008. Let’s see what December will bring.

China Gold Imports from Hong Kong Rising Along

While the physical gold outflows of the ETF’s of GLD continue (Chart 1) and those from the COMEX stay flat (Chart 2) (because they can’t afford to lose anymore physical gold), all this physical gold is bought by Asia as net imports and gross imports rose to record highs (Charts 3, 4, 5).

Chart 1: GLD Outflows

Chart 2: COMEX Gold Outflows (blue)

Chart 3: China Gross Gold Imports

Chart 4: China Net Gold Imports

Chart 5: Ratio Net to Gross gold imports

Hong Kong Last Day: Ascension To Great Buddha

For a vegetarian in Hong Kong, which better place is there to go to other than the Po Lin Monastery. This is the last day of my trip, time to get to work.

Hong Kong day 6: Mainland China’s Increased Consumption

Today we went to Hong Kong’s Ocean Park. This park features many aquatic creatures and shows to watch and has a lot of other attractions like roller coasters, water rides, giant swings, gravity simulators…

You can go there by taking the metro to Admiralty and then taking the bus to Ocean Park. I went there on a Tuesday. What struck me was that there weren’t a lot of people there. I could just go on a roller coaster without waiting. What struck me even more was that all people there were basically mainland China visitors. There were very few people from Hong Kong.

The most obvious cause is that the Yuan has been appreciating a lot, so all those mainland China people go visiting Hong Kong. A few years earlier it was the Hong Kong people who visited mainland China, that doesn’t happen anymore.  The yuan appreciated in just a few years time from 106 RMB exchangeable to 100 HKD, to 78 RMB exchangeable to 100 HKD. That’s an appreciation of 30% in favour of the RMB.

But enough babbling, here are some breathtaking videos. Other than exotic birds, giant fishes, jelly fishes, sea lions, dolphins, tortoises, monkeys, spiders, snakes,

I saw panda’s.

I saw penguins.

I saw otters.

I took the cable car.

Hong Kong day 5: McDonald’s technological advancement

Another technological advancement in Hong Kong is the Octopuscard. You basically link your bank account to this card and then you pay for everything at the movies, stores, transports and restaurants without having to input your passcode, nor do you have to do any recharging. This makes everything much faster, more efficient and more accurate.

I wish we had this in the western world.

Next on, we went to the Admiralty’s park of Hong Kong. The most beautiful place there is the aviary where you can walk in the habitat of the exotic birds. I found a very weird tree there.

Hong Kong day 3: The Great Basin’s Secrets

The third day was a day full of walking. We went up to the Great Basin to look at the lakes and springs. It was a 4 hour walk across the mountain. People walk their dogs here, away from the busy streets.

These mountains hold many secrets. We find here big spiders, butterflies, huge ants, weird plants, shrines, cliffs, small pathways.

Along the way you will see the skyscrapers beneath you.