“Macro Trade of the Century”

Crescat Capital have issued what they call their ‘macro trade of the sanctuary’, saying short the Yuan and global shares and long gold.

For many of the reasons we’ve reported in the recent past they believe the global economy is headed for a severe recession.  However specifically they are particularly convinced the Chinese credit bubble is about to burst and we will see the Yuan crash.  They rightly remind us of the large corrections on global sharemarkets in 2015 and 2018 just on Yuan devaluations let alone an outright crash.

Each of those devaluations was preceded by an Emerging Markets (EM) currency sell off, and that appears to be happening again now:

This is coinciding with the highest ever correlation of the Yuan and the Chinese sharemarket index, both are currently on the rise on the back of an incredible amount of monetary stimulus being poured in to the market by the PBOC.

They see this set up as very bullish for gold:

“During periods of crises in emerging market economies, asset classes can behave very differently. The one prevailing pattern is that gold prices almost always rise in local currency terms. Given our negative views on the Chinese yuan, and because we believe gold is historically cheap versus all fiat currencies, including USD, we are extremely bullish on gold. But we are most bullish on gold versus CNY. As shown below, gold in yuan terms broke out from a three-year resistance line and it’s now at the lower bound of an upward channel. We continue to think gold in CNY terms is an incredibly bullish setup”

If you had put that long gold (in CNY) v short global equities (MSCI World Index) over the last 40 years at a turning point like now (i.e. gold undervalued, shares over valued) you’d have done very nicely indeed.  They maintain the size of the credit bubble blown by China this time will see an even bigger return this time.

For Aussies, a crashing China will almost certainly see a crashing AUD, multiplying those gold in AUD gains.