Gordon Chang: Inflation nudging Chinese to buy more gold

By Daniela Cambone
Vancouver (Kitco News) --  Surging Chinese  Gold  imports reflect increased wealth but it also may be the result of consumer fears that inflation is higher than the government admits, according to an author who contends there are dark days ahead for the country.

In an interview on the sidelines of the Vancouver Resource Investment Conference here, Gordon Chang said China may be on the edge of serious economic slowdowns and said gold purchases may mirror some of the fears of the populace. Chang was also a speaker at the conference, which is sponsored by Cambridge House International.

Chang, the author of “The Coming Collapse of China” and a columnist for Forbes.com, said during the last couple of months there has been a surge of importation of gold into China. He said a lot of it is consumer driven and could be because there is an increase in wealth and people want to buy gold with their money.

But he said that wealth has been available for awhile. “The question is why are they buying gold in these quantities right now?” he asked. “I think largely there is a concern of inflation which is much worse than Beijing is willing to admit. For in December they said the inflation rate was 4.1% for consumer goods. It’s probably double that, and the food inflation is much higher.

“And I think people are really worried about that and now that they’ve got the ability to buy gold, they are buying gold in big quantities and I think that’s a sign of concern on the part of local Chinese as to what’s going on in China.”

Chang said he has a different view on China than many economists and analysts. He said during the past 35 years China has experienced tremendous growth, but that growth was caused by certain conditions which either no longer exist, or are fast-disappearing.

“I think the Chinese economy hit an inflection point probably in September and what we’re seeing now is slowing growth. But we’re also seeing plunging property prices, declining industrial production, and troubles throughout China’s export belt. I think it’s indicative of a new super cycle (but) this time the super cycle is not up, but it’s down,” he said.

Chang said there are interesting developments in China related to industrial metals, which should be pressured by a slowing economy. But he said with an economy becoming stagnant, China may be importing resource commodities at a higher level and stockpiling them to disguise a slowdown in consumer product imports.

“What’s happening is that Beijing is now stockpiling commodities like crude oil, copper, iron ore, in order to boost its import numbers,” he said. “So therefore you see this surge of commodities going into China which I think is stockpiling by the part of the central government in order to massage its trade numbers.”

Chang said this action will be good for resource commodities in the short term but “eventually, of course, that’s going to catch up with Beijing and you’re going to start to see declines in importation of materials, but for the moment now it looks really good.”

Chang said besides China’s domestic worries, there are concerns, too, that Asia may be affected by the lingering European financial crisis. These problems may be good for  Gold  prices, he said.

“For China I think there is also a concern about the general direction in the economy, but if you step back and look at the world, I believe Europe is going to trigger a crisis probably this year,” he said. “We’re going to see problems that are going to ripple throughout North America and Asia, and so in times of crisis you’re going see people go into precious metals, and so gold is certainly going to benefit from that. I think gold is probably going to move upward.”

By Daniela Cambone of Kitco News dcambone@kitco.com
Terry Wooten and Cecilia Tulikowski-Denison contributed to this article.


Courtesy:  www.kitco.com 

Gold: Higher prices are coming

While it is early to determine if the ongoing breakout is finally in anticipation of upcoming episodes of direct and indirect monetization by the Fed, ECB, or any of the many other pathological currency diluters in circulation, it is obvious that precious metals have found a new bid in recent days. Is this then, the beginning of the next surge in  Gold  andSilver  to record highs? It remains to be seen, but one entity, the Duet Commodities Fund which was one of last year's best performers, has already made up its mind.  'Our central forecast in gold remains constructive as our long term view targets $2,500 in 2012. Our core view is that gold will head higher to the $2,500 range driven by consequential USD weakness once the EU crisis dissipates and the US steps into the limelight. A weaker USD is not undesirable in the world order as everyone (especially China) understands that the US consumer is the driver for global consumer confidence and consequential consumption led demand." Wow - someone in this market can actually think one step ahead of the inevitable ECB LTRO/monetization, and realize that the Fed will in turn have to escalate to that escalation. Gold, er golf clap.

From Duet Commodities Fund

When written in Chinese the word “crisis” is composed of two characters. One represents “danger”, and the other represents “opportunity”. This is the most accurate way I can express my thoughts and feelings about the coming year in the commodities markets. Volatile, unpredictable yet scattered with times of great opportunity. The prophecy of the world ending in 2012 seems ever more relevant when we look at a world flirting with potential disaster. 2011 saw an avalanche of economic and geopolitical events, as well as natural disasters. All of which had negative impacts for commodities demand. The events of the “Arab Spring” re-invigorated fears of instability in the Middle East, the devastating Tsunami in Japan sent a domino effect along the manufacturing supply chains, the already fragile US recovery appeared to be losing momentum, in China the tightening of monetary policy heightened fears of a hard landing and finally European sovereign debt issues continued to escalate. So what does 2012 hold in store for us?

2012 stands a good chance of being politically pivotal, both in terms of people and a clash of ideologies. Among the five permanent members of the UN Security Council, Britain’s David Cameron is the only leader who seems certain of still being in power at the end of the year (famous last words). Barack Obama and Nicolas Sarkozy face presidential elections which they may lose. Dmitry Medvedev has already ceded the Russian presidency back to Vladimir Putin. Meanwhile in China, Hu Jintao and Wen Jiabao are due to prepare the handover in early 2013 of the presidency and prime ministership to Xi Jinping and Li Keqiang. Altogether some 70% of China’s senior leadership is expected to change. What I am trying to emphasise is that the world’s leaders will be preoccupied at home. There will be a large dispersion from which countries will succeed and which will suffer. Emerging markets will for the first time buy over half the world’s imports in 2012 and the “red back” will make faster than expected strides towards being recognised as a global functioning currency.

Of the main macroeconomic events of 2011 the European debt crisis and the “Arab Spring” have the potential for greatest continued impact in commodities in 2012. If we can intelligently prepare and navigate through these factors and overlay them with the respective commodity fundamentals, we will have a good base to forecast future prices. In Europe we do not believe that the situation will get to a point where the Eurozone breaks up. With the respective nations working hard to manage their situations at home what is very important is they agree on a roadmap on the process of fixing Europe over the next several years. With regard to the “Arab Spring” we have seen tensions re-appear in the Middle East and it seems apparent that this will not be for the last time. Also geopolitical escalation in Iraq and Iran seem likely. The US has removed all troops from Iraq which raises the question whether the country can withstand a potential future attack. In Iran the potential for sanctions appear high and increased political and potentially military action should not be discounted.

In the fundamental world we continue to view the commodities market as navigating between the currently balanced or tight physical markets and the threat that the European debt crisis could in the near future cause a global economic recession, which would  Lead  to a sharp drop in demand. The oil market is pricing at a discount to clear the physical markets and drawing down inventory cover in anticipation of a potential sharp drop in oil demand in the near future. This de-stocking is further tightening the physical markets and leaving the oil market increasingly vulnerable should oil demand prove better than expected, or supply disappoint. These forecasts reflect our view that  Crude Oil  prices will need to continue to rise in order to slow demand growth, restraining oil demand in line with limited supplies, even in a relatively poor economic growth environment. For 2012, we believe that the risk is skewed to the upside. However, when we reach the point where demand destruction has balanced the market a retracement back to lower levels is expected.

Our macroeconomic forecast remains supportive with commodity markets managing to avoid a global economic recession. Economists have lowered their forecast for 2012 world economic growth to approximately 3.2% (from 3.5%) and introduced a 2013 forecast of approximately 4%. This reduced outlook for world economic growth, while not forecasting a global recession, makes it more likely that the commodities market can maintain the central course embedded in our forecasts.

Our central forecast in  Gold  remains constructive as our long term view targets $2,500 in 2012. Until we see USD weakness and any associated inflationary expectation we may not see gold significantly higher unless there is further geopolitical unrest (Iran, EU, etc…). Our core view is that gold will head higher to the $2,500 range driven by consequential USD weakness once the EU crisis dissipates and the US steps into the limelight. A weaker USD is not undesirable in the world order as everyone (especially China) understands that the US consumer is the driver for global consumer confidence and consequential consumption led demand. Disturbing any improvements in the US growth economy will hurt all of the global trade partners so the Fed will be inclined to protect US competitiveness and growth via USD management. Throughout 2012 I think we will see various currency devaluations across the globe, as individual nations try to reduce the debt burden and also attempt to increase competitiveness in order to pull out of the recent recession. This debasement in currencies lends well for gold to increase in importance as a store of wealth.

So how do we make returns in such an environment? Our core views will not change often, but our timing, sizing and hedging pattern will become more frequent to take advantage of the volatile market conditions. We have mentioned many times to investors that our strategy puts emphasis on the “path” as well as the “destination” of commodity prices and that market’s seldom move in a straight line. This seems set to continue in 2012 where we continue to see a “tug of war” between physical fundamentals and macroeconomic events. Overall we are not long term bearish commodities. It is still a buy on dips world. The bears in the world will concentrate on three main subjects: lacklustre demand, a hard landing in China and Europe disappearing in a puff of smoke. We do not subscribe to this boundary condition. Demand has the potential to surprise on the upside and we are already seeing better economic numbers coming from the US. Also, commodities are about demand vs. supply and we do not need incredible demand when there are worse supply issues in key commodities. Europe is not going to be a quick fix but a long process taking several years. The key is consensual agreement and execution of this process which will neutralise the vast amount of fear and uncertainty priced in currently. When the US agreed on their course of action in early 2009 a risk taking sentiment unfolded. Once the EU agrees and implements their plan we may see similar benefits. China has managed its’ economy very well, containing price inflation and has now slowly taken the foot off of the brake. Overall this creates a picture that, albeit volatile, should trend higher over the course of the next twelve months.

We at Duet Commodities Fund wish you great success in 2012 and look forward to another year of working together.



Source:  Zerohedge.com