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Follow the Diamonds
05/10/2010 12:18 pm EST
Before the global financial crisis, the developing world was beginning to decouple from the developed world. Coming out of the recession, the gulf between the East and the West is expanding at an alarming rate.
In April, I was involved in mining conferences and investor presentations in six cities on three continents. Those travels provided a first-hand view of the enormous divergence in outlook among Asia, North America, and Europe. More than ever, it is important to consider the global picture in evaluating one's investment strategy.
In Europe and North America, media attention is focused on the sovereign debt debacle and the slow pace of recovery. Investors are concerned that efforts to clean up the mess in Greece could weaken the fragile economic recovery in the West.
On the other side of the world, government policy is aimed at keeping the pace of economic growth down to a sustainable level. One of the biggest concerns is finding enough raw materials to supply the economic engine.
Germans are bitter that they will have to bail out Greece. The low level of productivity in the Mediterranean nation, along with bloated salaries and pensions for civil servants, is hard to accept for the hard-working Germans. Germany will do everything it can to hold its lax euro zone partners to account. However, they are pragmatic enough to protect the euro. Further, Germany is one of the biggest holders of the €300 billion of outstanding Greek debt.
Austerity measures throughout Europe are dimming the prospects for a quick recovery in employment. Consumer confidence remains muted in most areas. The biggest economy—Germany—saw a rise in consumer confidence, buoyed by strength in exports. Volkswagen, Europe's biggest carmaker, is building two big new plants in China to keep up with demand there. Other companies are also planning expansions, to meet an expected 20% growth in the Chinese auto market this year. Last year, China became the world's largest market for automobiles.
Some analysts suggest the expansions may lead to overcapacity in the coming years. Industry executives point out that there are now 41 cars per 1,000 Chinese residents. That compares to 500 automobiles per 1,000 population in the US. No one has any notion that China will ever come anywhere close to the US love affair with the automobile. Even getting a few percent of the rapidly growing middle class into cars will maintain a strong auto industry for many years.
Rapidly rising demand for diamonds in China is leading to forecasts of a shortage of gems in the not too distant future. Fifteen years ago, there was no diamond culture in China. Today, 40% of brides in the three biggest cities are getting diamond engagement rings. China has another 100 cities with more than a million people.
India, which now leads the world in diamond cutting and polishing, is growing concerned at Chinese efforts to secure supplies of raw diamonds as a basis for starting its own diamond cutting industry. In anticipation of growing internal demand, the Chinese government is including diamonds in its shopping list of commodities. The government is working hard to establish relationships with other nations to pave the way for Chinese corporations to gain access to a wide range of raw materials.
China has overtaken Germany to become the world's largest exporter, with 10% of global exports. The country is the second largest importer (with 8% of global imports), exceeded only by the United States. World trade is projected to grow 9.5% this year, after shrinking 12.2% last year.
Chinese consumers are forecast to increase their buying of gold in tandem with their increasing prosperity. Already the second largest consumers of gold (after India), the Chinese are expected to further boost spending on jewelry. Investment demand for gold in China is still low, but that could also rise with growing wealth.
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