At least part of what we saw this morning unfolding in the commodities’ space is due to the realization (finally) that China is slowing, and, that, as China goes, so do the prices of “stuff.” A leading Chinese economic metric experienced a decline in October and it highlighted the increasing risk of a larger-than-desirable contraction in that country’s economic activity levels. We have, for months now, tried to bring you stories replete with warnings that such a slowing in the world’s second largest economy will not go ‘unnoticed’ in the world of commodities. It has not.
Intrepid Wall Street Journal / Dow Jones reporter Liam Pleven asked this question of his readers yesterday: “You want to know where the global commodities markets are heading in the coming years?” He answered it with: “Then it’s probably best that you remember a single word: China.” Investors have, for years, been hypnotized by various pundits who claimed that the appetites of Chin-dia for commodities are virtually insatiable and will never experience a contraction. Well, so much for that shoddily-built theory. Nothing, it seems, is immune to the basic laws of ‘gravity’ (read: supply and demand).
Mr. Pleven shoots a hole into the ‘non-stop Chinese demand’ paradigm by noting that “Many analysts consider the fast-growth scenario improbable. The consensus is that China is headed for slower economic growth than it experienced from 2001 to 2010, when its annual rate of expansion ranged from 8.3% to 14.2% and reached double digits on a percentage basis six times, according to the World Bank. If the consensus is right, the question becomes how much China's growth will slow.” Note that it’s not “if” but “how much” that matters here. Such prospects prompted Roubini Global Economics LLC’s director of global resources and commodity strategy, Ms. Shelley Goldberg, to caution that "Obviously, it doesn't bode well for commodities."
Another sign that the aforementioned scenario might be underway is to be found in the latest money-supply figures emanating from China. Not only did lending activity experience a slowing last month, but the country’s supply of currency expanded at the lowest pace in ten year. To be fair, China’s leaders did target inflation as “public enemy No.1” for most of this year. It turns out that they might have managed to do a bit more than just stop the inflation dragon in its fiery tracks, at this juncture. To be continued…
We leave you today with the wisdom of one Brett Korsgaard – Seeking Alpha contributor, journalist, and founder of Koa Capital Management. There is much to be gleaned from Brett’s analysis on the yellow metal, even if some of what he tried to remind us of should have been constantly on one’s personal radar throughout the past decade. Warning! The word ‘manipulation’ makes an appearance in a Nadler article. Not for the squeamish, that. Mind you, it is a wholly different kind of ‘manipulation’ than what you are normally sold at the conspiracy forum around the corner. Take it away, Brett:
“There is a store of value in most any hard asset, but the price paid does have a bearing on the potential for retention of value. Gold has a store of value at $300 an ounce, $800 an ounce or $22,000 an ounce. But is that store of value a moving target not exempt from manipulations by hedge funds and the madness of crowds? For those who think equities are manipulated on Wall Street, I have a surprise for you: So is gold.
“With the advent of exchange traded funds such as GLD (Spider Gold Shares) and IAU (iShares Gold Trust), gold as a securitized asset has been unleashed to all manner of manipulations. Just like Wall Street got a hold of your friendly neighborhood home through the sale of CDO’s and the juicing of the credit bubble, they can and are getting a hold of commodities and precious metals. Unfortunately, when manipulation comes into play what comes up usually does go down.
“What I have learned in my investing career is this: When the general public gets enamored of something, and when the masses are bombarded with ads extolling the virtues of gold, real estate, or stocks, that is generally a fair warning that it is time to give that asset class a miss. Better yet, time to sell and move capital to areas that better represent that proverbial “store of value”. This point seems to be lost on hardened gold bugs who are likely to see gold’s parabolic rise and fall and be harrumphing the same platitudes that they were during gold’s twenty year slumber while most other assets appreciated.”
Learn and live.
And the people bowed and prayed
To the neon god they made
And the sign flashed out its warning
In the words that it was forming
And the sign said, "The words of the prophets are written on the subway walls
And tenement halls"
And whispered in the sounds of silence
Jon Nadler is a Senior Metals Analyst at Kitco Metals