Gold, silver hit as lower growth forecast in China

In the Lead: “Fantasy Island Revisited”

Chinese Premier Wen Jiabao cautioned his fellow citizens to be on the lookout for slower economic progress in the current year as he addressed the national legislature overnight. Mr. Wen dramatically cut the target for Chinese economic growth when he offered a figure of 7.5% as the target for 2012. That number, for China, is a far cry from the “miracle” double-digit level growth seen for nearly twenty years and is also lower than the 8% expansion that had been forecasted by the government earlier this year.

The Chinese Premier also emphasized that it is imperative for his nation to concentrate on distancing itself from its overdependence on exports and to try to foster domestic consumer demand. How much of this new (and for some, worrisome) outlook promulgated by Mr. Wen is owed to the recent warnings on China by the World Bank and/or the IMF is as yet unclear. However, suffice it to say that there is a growing realization among Chinese officials that something is amiss in that country and that fixing the problem is not a matter of a few months’ worth of hard work. We alluded last week to the “new China syndrome.” It is, apparently, still afoot.

A devastating commentary by Caixin Online, written on Saturday, exposes just how much of a problem the country has at a time when “Stat-italism” appears to have run to the limits of what it can do about sustaining economic growth. You thought you had heard it all when you read about the Navy’s $435 hammer? Get ready to hear of something even sillier than that when it comes to the prices of toilet paper holders on China’s bullet trains. Echoing a recent line from the World Bank, the Caixin commentary concludes with the warning that “If our pace of reform continues to lag behind the expansion of state-owned capital, we will soon hear talk of not the rise, but a crisis, of state capitalism.”

Over in the USA, the ISM’s gauge of the service sector rose last month, reaching the 57.3% mark and it exceeded the level that had been expected by polled economists. The US services sector is the principal employer of America’s workforce. Add another reason for Warren Buffett to be more of the “Doom Slayer” that some have labeled him as already being. Mr. Buffett raised untold pairs of (somewhat baffled and/or angry) eyebrows when he recently dissed gold and showed a fondness for equities and real estate in its stead.

It might however be reasonable to assume that if Mr. Buffett saw “value” in gold at a given level - not the current one- (as he certainly did with silver at under $5 when he bought 138 million ounces of it -more than a year's worth of retail investment demand) he might well make a short-term “play” in the metal. He is just not enamored with it as a long-term store of value and is apparently more inclined to be seeking out “productive” assets.

To the extent that he is often quite bullish on America and on specific American equities, Mr. Buffett is also exhibiting the opposite of what most “overload in gold now!” proponents have to offer; visions of a USA in ruins, of its soon-to-be-dead currency, and of people running around in a post-apocalyptic, Mad Max-like world bartering their mini-Krugerrands for sustenance. They might consider filter tips as an alternative. Read on:

When speaking of the (non-imminent) death of “fiat” currencies, one might as well consider the ultimate such medium of value exchange. Before you jump to name the obvious “hard” and shiny best currency, consider…Marlboros and Camels. Yes, indeed, it turns out that cigarettes are the world’s most stable international currency. In my native country, back in the 1980s, it was de rigueur to bribe your doctor or butcher with a pack of Kents in order to get any service of good. The little white boxes were never opened; they were just traded for a higher ‘value’ the next week, to another provider. Not a case of “Smoke’em If Ya Got’em” by any stretch.

We close today with a list of popular fantasies. One cannot help but revisit the roster of myths and misperceptions, as they have become thoroughly ingrained in certain investors’ psyches over the past several years. The tabulator of the list, veteran market observer Ned Schmidt, suggests that making investment decisions based on what turns out to be little more than “conventional wisdom” (which is often anything but wise) presents risks to your wallet. Here then is the world of investment-driving fantasies that Mr. Schmidt has compiled for us to consider:

  • Government spending creates prosperity
  • Hyperinflation is imminent
  • Federal Reserve is running the printing presses
  • Keynesian economists are better forecasters than airport cab drivers
  • QE1 will produce economic growth
  • Inflation is good for gold and silver
  • Deflation is good for gold and silver
  • The sun is coming up for gold and silver
  • QE2 will produce economic growth
  • Gold is going to more than $2000 this year (a perennial favorite)
  • Silver is going to more than $100 this year (another perennial favorite)
  • QE3 is imminent, but everything!
  • US dollar is to implode
  • Euro is to implode
  • Social networking sites are real companies
  • CNBC is more informative than the Cartoon Channel
  • Bear market rallies are prices breaking out
  • Junior mining stocks are investments
  • Apple is a buy at $540, as per 54 out of 59 analysts
  • Iran will not build a nuclear weapon
  • Vladimir Putin is not a threat to world peace.

Well, that about cover it all. Or, almost.

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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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