I am often asked by subscribers to our International Speculator why I'm so sure the economy of China is going to continue on a roll, in turn keeping demand high for commodities in general, and precious metals in particular.
Rather than going through the macro-economics, I tend to abbreviate by referencing China's troubled history, and pointing out that China's leadership, which today are communist only in rhetoric, are well aware that they are an anachronism. Which is to say that a serious slowdown in the economy, with its attendant mass unemployment, could quickly turn into a terminal event... politically and maybe even personally. So they'll do what they must to keep the economy humming along. And that is to continue to benefit from the lessons so clearly learned in Hong Kong... first and foremost, staying out of the way of the market.
Put another way, now that the capitalist genie - or, more correctly, 1.3 billion genies - is out of the bottle, there's no soft way of going back.
As David Galland points out in the article that follows, the best way to take advantage of China's explosive growth comes from getting positioned in gold (and for leverage, gold stocks)... the cultural default for wealth in Asia. As you'll read, the signs of China's new golden age are already starting to appear.
More straws in the wind for gold... a wind coming out of the East.
On March 29 the Tokyo Commodity Exchange (Tocom), the world's fourth-largest commodity futures exchange, announced the loosening of margins to allow greater daily price fluctuations for gold. The move broadens the range by 33% as of April 1.
But it was not only what they did but what they said that caught our attention. According to Bloomberg, Shigeharu Amari, the general manager of Tocom's public relations department, said that "Heightened demand for gold in China and India have led to major swings in bullion prices over the past six months, which is why we decided to make the change."
China's traditional cultural affection for gold, understandable given that country's troubled history, was suppressed by Mao and company for 52 years, until the liberalization of gold ownership in 2001.
Today, that affection for gold is being stoked even hotter by concerns over a falling dollar and a pig. Actually, the rumor of a pig. In the Chinese lunar calendar, 2007 is the "year of the red pig," purportedly a very auspicious year. Better yet, it is also widely rumored to be the "Year of the Golden Pig," which, according to fortunetellers, only comes around every 600 years.
The lunar calendar kicked off on February 18, 2007, but even before the starting gun, the pick-up in Chinese gold sales was apparent; in 2006, according to the China Gold Association, gold consumption in that country grew by 17%. Toss in a golden pig and things get a lot more interesting. Even though the country's annual gold production is forecast to reach 260 metric tonnes this year, it will fall about 100 tonnes short of meeting Chinese demand. The Shanghai Gold Exchange, China's only precious metals trade platform, noted a gold trading volume of nearly 130,000 kilograms in January, a rise of 72.83% over the same period last year.
For the other great contender, India, gold jewelry has historically played a crucial role--60% to 70% of all jewelry is sold during the wedding and festival season in October and November, and many Indian banks provide loans for purchasing gold jewelry. Even though higher prices have pushed gold jewelry sales down in 2006, most analysts now see gold in India taking on a larger role as an investment for the newly affluent looking to protect wealth (Indian inflation is now running at 6.5%), versus just as body décor and status.
Speaking of Indian investment, on February 15, the first Indian gold ETF launched, the Gold BeEs of Benchmark Mutual Fund. The second ETF launch, the UTI Gold Exchange Traded Fund, is already underway. Rajesh Bhojani, UTI Mutual Fund's president of marketing says about 30% of the gold market in India is investors-and we suspect the new gold ETFs are going to dramatically boost that percentage.
Hopping back to China, by now anyone with any interest in gold is aware of the rock-and-hard place dilemma caused by the 700 billion greenbacks now littering China's official reserves. In 2006 alone, the Chinese took about $3.4 billion in exchange rate losses ... chump change today, but a clear warning shot of far bigger losses to come.
Diversifying out of the U.S. dollar and into a far more diverse basket of assets, including tangibles such as gold, has become a very high priority in China. But yet, despite announcing last year that they were starting a new government investment management corporation, the primary purpose being to manage their towering reserves, the Chinese don't seem to be in a big hurry to diversify. Well, maybe not all is as it seems.
Recently, the Chinese engaged in a bit of carefully orchestrated theater, the purpose of which was to reassure the world's financial community they were not going to rock the boat in an attempt to diversify out of their hundreds of billions of dollar reserves. The show kicked off with Wen Jiabao, China's premier, assuring the market in a press conference that China's new investment regime "would not have any impact on U.S. dollar-denominated assets."
The opening act was followed a few hours later by China's central bank when it pulled back the curtain on a report stating that it wouldn't be making "frequent, major adjustments to the structure of the reserves in response to market movements."
But, switching analogies, let's just suppose that the Chinese, rather than being poor chess players, were actually pretty good at the game... and the bright young team now being assembled to manage the diversification of China's massive reserves were actually intent on their task?
Might the Chinese go out of their way to reassure gullible markets that they weren't going to be unloading dollars, when they actually were... getting rid of as many greenbacks as possible before the broader markets caught on? It is certainly within the realm of possibility. In fact, if you look at it through the spectrum of a leadership for whom the "Big Lie" has been an official policy tool for better than half a century, it becomes downright likely.
That this may be the case is made all the more apparent by the recent news that China had invested $3.3 billion in Blackstone, the U.S. private equity firm. You can rest assured that their investment strategy is far more diverse than just investing in U.S. Treasury bills.
The global supply of gold is already under pressure. From rising investor interest, helped along with hugely popular new ETFs in the U.S. and London (among others) and from the institutions and hedge funds now beginning to recall that gold is a good portfolio asset. Throw onto the scale the rising demand out of a booming Asia and the very real possibility that the U.S. dollar has seen its best days, and you have all the pressure you need to see gold heading much, much higher from here.
How much higher? Impossible to say, but it is worth noting that, on an inflation-adjusted basis, gold would have to rise to $2,276 just to equal the previous $850 high.
How you play the unfolding gold market will depend on your psychology and temperament... with your choices ranging from straight bullion on the tame side, to the extreme leverage of futures on the wild. Around here at Casey Research, we focus on the middle path; higher-quality gold shares that, with some dedicated effort, can be well understood. And if they can be understood, then the worst of the risk can be eliminated, leaving mostly just the truly explosive upside.
Whatever approach you take, however, just make sure that you don't procrastinate to the point of missing the boat altogether.
The Golden Age is upon us.
David Galland is the managing editor of Doug Casey's International Speculator newsletter, now in its 27th year, dedicated to bringing investors unbiased research on investments with the potential for 100% or better returns over the coming 12-month period.
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