China decreased their holdings in U.S. Treasuries by a record amount in a U.S. government report issued yesterday. Treasuries at the moment are experiencing a steep rise as the U.S. is financing its staggering debt level by offering its obligations to other countries. China has historically been the largest holder of U.S. debt as a means of promoting a strong dollar, but the unattractive yield along with reckless government spending seems to be causing the Chinese to rethink the risks and benefits of holding U.S. government bonds. On one hand, they need to make sure the U.S. currency does not devalue but on the other hand they need to protect themselves from a treasury bubble.
There seems to be a major investment shift away from treasuries as the Chinese are skeptical of the U.S. debt situation. The Chinese are looking to make strategic investments in natural resources. China may not be public about their policy move, but they are taking significant steps to increase their position in mining and energy companies. In 2009 the Chinese Investment Corporation, a state owned company, took a large ownership position in Teck Cominco and Penn West Energy Trust. They are looking for mining stocks to diversify their holdings. This major policy shift from Asia transferring assets from U.S. debt to natural resources could spread. We could soon be seeing a top in U.S. Treasuries and more acquisitions for premiums in the junior mining sector. In fact, a couple of the companies I followed last year had major investments from Asia. As demand has exceeded supply, they have been compelled to import certain commodities such as uranium and molybdenum rather than their traditional role of being the exporter.
Treasuries have made an enormous run, but the recent gap up and reversal could mean that it has exhausted its move and may be headed lower. This gap up and reversal, which made railroad track-like formations in the chart should be observed cautiously. High activity days with a jump in volume or price call for close monitoring. The manner in which price reacts to the gap is crucial. If we see a two-day reversal pattern after a gap up where it closes near the opening of the previous gap, it is a sign that buyers are doubting the previous day’s jump.
Long Term Treasuries spiked higher during the “flash” crash and has proceeded higher for the past four and a half months. Although a two day price pattern is not reason enough to go short, it does raise a warning bell of caution when combined with the overbought reading.
Now the rally from April is 12.5 percent above the 200 day moving average. It has also reached its upper resistance line. As I indicated above, the buying from the Fed and overseas will abate and we may soon be at a juncture where treasuries have exhausted their move. There are negative divergences with momentum which price usually follows.
China’ s move to decrease their holdings may be starting a trend that could influence other countries as the scramble for basic commodities and hard assets continues. This commodity search should spread to U.S. mining companies, especially as the dollar and treasuries weaken. I expect an increase of acquisitions in U.S. gold, silver and base metal mining companies in the next few years.