China's grey rhino, in the form of Evergrande, has progressed another ten days since I last wrote about it. As predicted, nothing has been done to stop it. Rather, it has been directed out and away from China. This has led to a drop in real-estate related assets in Hong Kong. China's financial export hub is primed for global distribution of China's financial train wreck. The world will be caught up in this debacle in ways similar to how the virus caused havoc everywhere after its initial outbreak inside China.
The likely outcome of this will be the same as it always is when asset bubbles pop. After an initial drop in price, gold goes up while everything else goes down.
The reason for this is that gold is sold for cash at the beginning by leveraged investors. But this stops relatively soon because few speculators have mush exposure to the yellow metal. They are mainly invested in the bubble. Once they've sold their gold, they continue to sell bubble assets, and whatever cash they get is then put into safe haven assets. The safe haven asset of choice is traditionally gold, and will again be gold because it's far from bubble territory at the moment. Historic data shows it to be underappreciated.
Looking at the daily gold chart, we see that gold is down since September 3. But it bounced on the news out of Hong Kong this morning. The selloff associated with the initial unwind may already be over. Bitcoin, on the other hand, is continuing its decline. It's not behaving like the safe haven asset that many believe it to be. On the contrary, it's behaving like the speculative asset that it actually is.
It's still early days in what looks increasingly likely to become a major sell off in risk assets, but the trend may already have been set. Gold will go up while everything else goes down.
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| Train wreck |
By Photo credited to the firm Levy & fils by this site. (It is credited to a photographer "Kuhn" by another publisher [1].) - the source was not disclosed by its uploader., Public Domain, Link
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