If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
Gold, China, and Resources
06/03/2005 12:00 am EST
Last week, we featured commentary from Mary Anne Aden on gold and the dollar. Here, Pamela Aden offers an additional perspective on gold and resources based on the outlook for China. We also offer the sister's latest stock ideas in the natural resource sector.
"In less than 20 years, China has become a major world force. It’s transformed itself from a rural agricultural economy into the second largest economy in the world. It is also the world’s fastest growing economy at 9% annual growth over the past ten to 15 years, and it’s expected to keep growing for the next 20. China has become the world’s fastest growing exporter, it’s built up huge reserves, and the US trade deficit with China is the biggest ever recorded between two countries. And since the average wage for a Chinese factory worker is 92 cents an hour and US wages are about 23 times higher, millions of US jobs have been lost and transferred to China. Investments are leaving the US and moving strongly into China.
"What is happening in China is on a scale unlike anything the world has seen since the early days of the US industrialization. Because China is growing so fast, it needs everything as it builds its infrastructure. This has been putting a lot of upward pressure on commodities and oil and metals, and other resources. China’s oil imports now account for a third of global demand, and suggest much higher oil prices in the years ahead. That in turn will lead to more inflation, which will be good for gold. I can’t emphasize enough how important the China factor is in the world economy. It is dramatically changing the world landscape in the markets.
"Everyone is buying low-priced Chinese goods. For example, almost everything sold in Wal-Mart is made in China and most of you are probably wearing something made in China. Fiscally, China is to the US what the US was to Britain in the early 1900s. Most interestingly, China’s growth is coinciding with the 200-year commodity cycle. Looking since 1804, there have been five major upmoves in commodity prices over the last 200 years. The sixth is just beginning. This happens about every 30 years or so. And with China being the largest consumer of commodities and its consumption poised for explosive growth,. China will be an important influence driving commodity prices much higher in the years ahead.
"There are now three billion people that are part of the world economy that weren’t a factor before. In addition to China, there is the emergence of India, and other parts of Asia and the former communist countries. As these people become more affluent, they will also need more oil for their cars, food, resources, and metals for their growing infrastructure. This too will keep upward pressure on commodities and provide an ideal backdrop for gold. Also interesting is that these major commodity rises have coincided with wars. Like the Civil War, WWI, WWII, and now the war on terror. This also argues for higher gold prices, as gold tends to rise when there is uncertainty and tension in the world.
"There are so many hot spots in the world, that we simply don’t know what will happen on the geopolitical front in coming years. But the markets are telling us a mega change has occurred. We obviously don’t know how it is going to unfold. But somehow, a global conflict will probably play a role. We do know that we have to be prepared for unexpected and protect ourselves the best we can, and that’s why diversification is important. The best way to do that is by holding some gold, other metals, and foreign currencies, which will continue to rise as the dollar falls.
"Remember, gold is the ultimate currency and it always has been. Throughout history, paper currencies have come and gone. But gold is real money and it’s maintained its value over the centuries. And unlike all other investments, it has a 5,000-year track record. If nothing else, think of gold as an insurance policy. We think that’s the best way to look at it, during these volatile and uncertain times. We don’t think you’ll regret that you did. Put some of your investment dollars into gold, silver, and the resource sector."
"For now, we recommend keeping a 50% position in gold, silver, various metals shares, or an exchange traded fund such as streeTRACKS Gold Trust (GLD NYSE). Among our gold shares, the following have held up best: Royal Gold (RGLD NASDAQ), Central Fund of Canada (CEF ASE), Agnico Eagle (AEM NYSE), Barrick Gold (ABX NYSE), GoldCorp (GG NYSE). Silver Standard (SSRI NASDAQ) is the best among the silver shares. The resource shares that continue to look good are WMC Resources (WMC NYSE), Cameco (CCJ ASE), BHP Billiton (BHP NYSE), and Rio Tinto (RTP NYSE), as well as US Global Resources Fund (PSPFX)."
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