Friday, 21 May 2010

China Hedge Part II

Earlier last year I wrote a post about the China Hedge and there's further activity as the video shows.

Click here to view Video.

Is Gold in a mania? Is this the end of the bubble? Or are the Chinese ahead of the game yet again? The clip mentioned that China has now become the largest Gold producer in the world, surpassing South Africa (which incidentally has been in decline for a while now). The Chinese are digging like crazy for the stuff, they have been for years as the Government knows the yellow stuff is the key to their economic well being during the next 10-20 years. We don't have a bubble, but the Central Banks and Governments will create one here. George Soros aptly called it the 'ultimate bubble' and I agree. When he said this many looked at his comments and concluded that this meant gold was already in a bubble, but I never drew that conclusion, he's a smart guy. As it transpired later Soros actually added gold to his fund. Funds all around the world are increasing their holdings. But we are way off the bubble top, years away. 

The fundamentals for the bull market just keep getting better and the authorities apostles, such as Paul Krugman, keep telling us Gold bugs what we want to hear. Apparently we aren't doing enough. Right? We've been here before Mr Krugman. You've been telling that gruff to Japan for 20 years now and what have they got? Huge debts and a basket case economy. Get those interest rates lower, increase spending and get more money into the pockets of people. I forgot that prosperity was that easy.

China has also become the largest Gold consumer, which is another huge shift in the world. Ten years ago their citizens couldn't buy it, now the Government actively encourages purchases. You can't eat gold? You can't use gold? But you can't use or eat worthless paper tickets, promises of payment, that we call money. Bonds are a disaster. Housing is going to be a terrible way to hedge going forward and stocks, dear me, companies have that much state intervention Karl Marx would be proud. Only Cash is going to do worse than the list above. However Gold is outside the system. It's no ones liability. However stupid, despotic or mad our leaders become, it won't affect gold. 

We all await the China crash. Marc Faber seems to suggest sometime in the next 9-12 months. More market commentators have noticed. Hugh Hendry, Jim Chanos, Mish Shedlock with many of the underground economics forums also beginning to discuss the events that are happening. Evey Credit boom ends, and there is never the 'soft landing' that is always told, it always gets messy. However when China does run into difficulties don't think this is it. It will just be a setback, many of the above also agree with that concept. Unlike the West, China is starting from a very low industrial base, meaning there is still huge potential to grow. She will just grow her way out of problems eventually. Remember the US had huge issues as it rose to become the superpower. The Great Depression, the panic of 1907 and many financial storms throughout the nineteenth century. She overcame them all as it was from a lower industrial base and she borrowed money to produce not consume, similar to China. Of course when China stumbles what will happen to Australia in the short term? Many Asian nations - Japan, Malaysia, Vietnam? African nations such as oil rich Angola or Nigeria? South America, with Chile and Venezuela? Not only are the Chinese buying gold but they are forming huge trade links around the world and also practice a form of check book diplomacy. They use their monetary reserves and labour to build infrastructure for such countries to access the natural resources they need and buy some friends while they are at it. 

The Eurozone, Chinas biggest importer won't be doing the country any good with what's happening there. Previously I contemplated that Euro members could leave as they can't adapt to the Germans mentality. However I now think its the Germans, the strong rather than the weak, who will leave! I mean the recent bailout is a complete disaster - no one has the funds to pay for it. This will just further undermine the Euro in the long run. I think it may now be more likely that Germany will leave as there are more mutterings from their public that they've already had enough and want a return to the sound Mark. If that happens you can kiss the Euro goodbye. The Germans are the only ones disciplined enough to run a relatively sound currency (perhaps Finland, Holland and France also). The Euro needs the Germans. Again all this just puts further gloss to the gold bull run. You can't even turn to the Germans for sound money any more.

We are witnessing the breakdown of the welfare experiment since Nazi and Japanese expansion created the Western promises 'a society fit for their war hero's'. The social ratchet kept tightening, with no politician loosening the grip. Just like the collapse of communism it will be the free market that defeats statist policies. It always does. While we transition there's going to be some pain along the way. Chinas Hedge continues....


  1. "When he said this many looked at his comments and concluded that this meant gold was already in a bubble, but I never drew that conclusion, he's a smart guy. As it transpired later Soros actually added gold to his fund. Funds all around the world are increasing their holdings. But we are way off the bubble top, years away."

    As seen in your link, Soros bought that gold in 2009. That was before he made his "ultimate bubble" comment. Hindsight shows he then became a seller.

    Soros on Gold

    His fund cut its stake in SPDR Gold Trust (NASDAQ: gld) by 9.6 percent

    Just something to think about. I'm bearish on China and I'm fairly bearish on gold.

    I do link to your blog on my blog though and enjoy reading what you have to say. We'll just have to agree to disagree on this though.

  2. He must be short term trading :-)

    Many Hedge funds are moving into cash as they think many assets will fall due to another round of forced liquidation triggered by the announcement of reduced stimulus (and the fact governments are having issues).

    Soros did make those comments near the beginning of this year, so the previous quarter showed he had bought a lot. He's probably trying to influence the short term price :-)

    For most of us we shouldn't trade or worry about short term moves. Sure Gold can correct 10%-20% on the downside but it will just go back up and its very hard to time these things.

    Bearish on gold? Well I think many Americans just look at their own situation. I'm British and since 2008 the price stood at around £450 for an once, now its over £800 an once. Problem is I can't see the pound strengthening so Gold to me is a no brainer (we also have a problem with inflation here which you don't seem to - yet!). Also just because the dollar rises in the short term doesn't mean it has sound fundamentals. It will continue to weaken against Gold, deflation, inflation - it doesn't matter. Throughout the bull market Gold has never collapsed in price, it remains the only asset to make slow moves continuously upwards and remains an anchor for stability during the chaos that will get worse moving forward.

    Regarding Deflation or inflation - Deflation the whole system collapses and everyone's piles into gold as default rates go through the roof. Inflation and all the capital structure is destroyed meaning gold goes through the roof. Hey, its a one way bet. The Governments have gone too far now and beyond the point of no return.

    We can agree to disagree on this. I haven't met a person that agrees with me on gold yet, or doesn't look at me as though I have mental problems when I mention it :-)

    Be wary of your TIPS - I read that you invest in them. Gold doesn't lie, while governments can lie about inflation. The algorithms are always open to change to understate inflation. You will do much better in gold over the next decade.

  3. Phil,

    I am wary of my TIPS. I think they are somewhat overpriced.

    You should be similarly wary of your gold though. Unless it really is different this time (which I do think it is to some degree), no asset is good at any price. At $250, bargain. At $1200, perhaps not so much.

    I owned gold and silver for a 50% ride from 2004 to 2006. A third of my nest egg sat in it. I have no interest in it at these prices.

    Throughout the bull market Gold has never collapsed in price, it remains the only asset to make slow moves continuously upwards and remains an anchor for stability...

    That was true of dotcom stocks until it wasn't. It was true of real estate until it wasn't. It was true of oil until it wasn't.

    Hey, it is just an opinion though. It is a good thing to have people disagree on the value of assets. It is that disagreement that sets prices. :)

  4. You may be right that $1,200 is overvalued, but based on inflation adjusted terms (based on the governments dubious figures) people have actually calculated it should be nearer $2,200 an once. $250 was very low because there were other bubbles that were attracted the money.

    One calculation to bear in mind is the fact that the price target moves over time. When further inflation happens down the line with increased uncertainty then the goalposts move. Cash, stocks, real estate and bonds move down relative to gold as the governments do all they can to disrupt the economic system and devalue money.

    Oil will make new highs going forward - that doesn't mean it can't collapse in price. The problem with commodities is volatility (include silver in this list). Gold on the other hand doesn't have the same volatility.

    No doubt gold will become a bubble, and then its value will not be fair, but I have seen no evidence of this. Like I say, no one that I have met are buying gold, instead they are discussing housing (here in the UK the bubble continues inflating, unlike the US where market forces are allowed to run course more), Stock market etc. Also we haven't had the real crisis, government bankruptcy. The economy hasn't been fixed, and we have more state intervention. Here in the UK they are proposing rising Capital Gains Tax to 40-50%, I mean it boggles the mind. Theres going to be a lot more stupidity going forward thats for sure and with it a rising gold price.

  5. Hey Phil,

    It probably won't convince you one way or another but I do think it is something worth thinking about.

    Gold to Aluminum Price Ratio

    I agree with most of what you say. We just seem to differ on whether gold is a good hedge for the stupidity that keeps coming.

  6. Thanks Mark.

    I think we will just have to see what happens and agree to disagree on Gold.