The worst sentiment since 1985...

Why China is on a massive gold-buying spree…

In today's Digest Premium, John Doody – among the most successful gold-stock investors we know – explains why he thinks China is buying so much physical gold today.

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

The worst sentiment since 1985... How to make money in homebuilders today... Jeff Clark: Gold stocks set for a correction... Private equity enters the mining sector... China buying more gold... A secret plan?... John Doody in Digest Premium...

 Two bits of economic information are holding the markets hostage today...

First, the Empire State Manufacturing Survey, compiled by the Federal Reserve Bank of New York, fell eight points in February to 4.5. The survey polls corporate executives on their current view of New York's business climate, and any reading above zero is bullish. The February drop is coming off a 10-point increase in January.

Though the report didn't cite winter weather as a reason for the slowdown, it likely played a part.

 Also, the National Association of Homebuilders (NAHB) sentiment gauge fell to 46 in February from 56 in January... It was the largest monthly drop on record (since 1985). And a reading below 50 means the majority of homebuilders reported poor conditions. The reading was lower than the weakest forecast from analysts surveyed by Bloomberg.

The weather hurt the NAHB reading...

"Significant weather conditions across most of the country led to a decline in buyer traffic last month," NAHB Chairman Kevin Kelly said in a statement. "Builders also have additional concerns about meeting ongoing and future demand due to a shortage of lots and labor."

 But as Steve Sjuggerud and Brett Eversole discussed in today's edition of our e-letter DailyWealth, this is a good sign for homebuilders... Having more buyers than homes to sell is a good problem to have...

To read the entire essay on homebuilders today, click here...

 The market is flat following the two economic announcements. Bad news is good news today, as new Fed Chair Janet Yellen has said she'd step in at any signs of discomfort with more quantitative easing. Perhaps that's why gold is up 0.25% to more than $1,321 an ounce today.

Gold stocks are down slightly. Investors are likely taking some profits. The Market Vectors Gold Miners Fund (GDX) – which holds many of the market's largest gold-mining stocks – is up 20% so far this year.

According to S&A Short Report editor Jeff Clark, we could see a further correction in gold stocks before the bulls take hold again. In his Direct Line real-time blog for S&A Short Report subscribers, Jeff wrote:

 But the long-term bull market for gold is still on... Gold stocks are still way down from their peak. And lots of money is waiting to enter the sector. In a private e-mail, S&A Resource Report editor Matt Badiali explained how private-equity firms are getting into the game...

Matt said these funds are "circling the carcass" of the mining industry. And these executives know which assets are the best to acquire.

 According to Matt, private-equity funds are in the mix, too... According to Bloomberg, private-equity groups put up $9 billion over the past 18 months to invest in mining assets.

Some mining companies have enough cash to execute deals. But Matt says he expects to see private-equity funds get more active in the next few months. "Acquired at the right price, many of these mines will be excellent businesses for years to come," he said.

 A few more bullish notes on gold...

Hedge funds raised bullish bets on gold to a three-month high last week... The net-long position rose 17% to 69,291 futures and options in the week ended February 11, according to data from the U.S. Commodity Futures Trading Commission (CFTC).

Also, investment bank Citi released a recent report predicting gold could hit $1,685 an ounce, based on technicals.

 And China is still buying...

According to the latest data from the gold-industry trade association World Gold Council (WGC), China overtook India as the world's largest buyer last year. China's demand for gold bars, coins, and jewelry soared 32% to a record high in 2013.

And China should be able to sustain the No. 1 spot...

"China is 10 years behind India in terms of deregulation and growth of demand," Marcus Grubb, WGC's managing director of investment strategy said. "Given last year was such a strong year, it will be hard to equal that again in 2014, [but] the stock of gold in China is less than half of that in India, so we think there's plenty more room to grow."

 It was illegal for Chinese citizens to own gold up until 2002. Now, they are buying and storing gold as affluence increases. From the Wall Street Journal:

 Also, the Industrial & Commercial Bank of China, China's largest bank by assets, said trading volume in precious metals increased 22% in the first three quarters of 2013 year-over-year to 1.07 trillion yuan ($176.6 billion). And sales of gold bars are at their highest level in four years.

 We've long known China and its citizens have been buying up every bit of gold they can get their hands on... And they took advantage of last year's price weakness to accumulate even more. We're seeing a massive transference of wealth and power from West to East.

There's no doubt China is nervous about the United States' unsustainable debt load... After all, China holds nearly $4 trillion in reserves. And 60% of that is in U.S. Treasurys. But China can't simply dump its Treasurys... It would hurt them as much as it would hurt us.

That's why the country is vacuuming up the world's gold... We believe they have a secret plan behind their actions (something the Chinese government would never admit). Matt Badiali explained what he thinks the Chinese are preparing to do with all this gold in a special presentation. Click here to learn more...

 Also, we're featuring exclusive commentary in Digest Premium this week from one of the best gold-stock analysts we know... John Doody, editor of the Gold Stock Analyst advisory service. John will explain the current state of the gold and gold-stock markets... what China's gold purchases mean for gold... and he even shares the name of one small gold stock he thinks is an acquisition target.

 No new highs. Markets closed for Presidents' Day.

 We hope you enjoyed the long weekend... and the short break from our missives. As always, send your feedback to feedback@stansberryresearch.com.

 "I really enjoy the S&A Digest and the information provided, thanks. In this month's issue you advise to sell short shares of [a certain company].

I do not understand how to do this transaction. Can someone explain it or provide this information so I can understand how to implement the recommendation." – Paid-up subscriber Jack

Goldsmith comment: When you sell shares of a company short, you borrow those shares from a broker and sell them on the market. You hope to be able to buy those shares back in the future at a lower price to "cover" your short sell. Your profit would be the amount the stock fell.

Your broker should allow you to sell short. There's usually a "sell short" option when entering a trade. We would recommend calling your broker for specific instructions.

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Regards,

Sean Goldsmith
Miami Beach, Florida
February 18, 2014

Why China is on a massive gold-buying spree…

Editor's note: We've drawn today's Digest Premium from an exclusive interview with John Doody, founder and editor of the Gold Stock Analyst advisory.

John's track record is exceptional. Between 2001 and 2012, his "Top 10" portfolio of gold stocks returned more than 1,200%...

Today, he shares his view on why China is making major investments in physical gold.

 I believe China is buying all the physical gold it can get its hands on for two reasons...

China is encouraging its citizens to buy gold, which makes sense on an economic basis because it absorbs the U.S. dollars that its citizens are accumulating... and that the companies owned by its citizens are accumulating from exports to the U.S.

So it makes the central bank's job easier by not having to sop up those dollars by issuing yuan. If Chinese citizens simply use the dollars to buy gold, it saves the central bank from having to do so. So that's a good reason for China's central bank to advocate gold.

 But I believe China's central bank is also accumulating gold itself. China only reports its gold holdings every five years. China is not a member of the International Monetary Fund, so it doesn't have to report its gold holdings every year. And the last time China reported was April 2009. So a lot of people expect China will tell us what it owns in April 2014.

 The interesting thing is, China is the world's largest gold-producing nation. It produces about 35 million ounces of gold a year... And it exports none. China imports a similar amount through the Shanghai markets.

Now, some of that's going to citizens, but is it all going to citizens? I don't think so. I think some portion of that is going to the Chinese central bank, and we'll find out. The Chinese would like to have the same privilege with their currency that we have with the dollar... that we can pay our debts simply by printing more dollars.

If China gets to the stage where it's a net borrower from the rest of the world, it would like to be able to print the yuan to pay its debts, which it cannot do now.

– John Doody

Why China is on a massive gold-buying spree…

In today's Digest Premium, John Doody – among the most successful gold-stock investors we know – explains why he thinks China is buying so much physical gold today.

To continue reading, scroll down or click here.

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