We track the Commitment of Traders report in four major domestic metals markets – gold, silver, platinum and copper. Currently, the commercial trader category is roughly bullish on the lot of them. Very rarely do we see all four metals markets telling us the same thing. While the markets may seem similar, their uses in both industry and investing provides each of the four with subtle nuances and slightly negative correlations that keep them from syncing up very often. Currently, the commercial long hedgers, the ones who take metal off the market for use in finished products or locked up in investments feel that the platinum market is a nearing bargain levels as it hasn’t traded this low since 2009.
Much of the current global growth scenario is built upon the notion that China will continue to supply the fuel. Long term, this is a generational move that will happen as China demographically reinvents itself. However, I’m more interested in what may happen this year and how I can prepare myself for it. China’s economy has been growing at a break neck pace with several years of compounded double-digit returns. Even the economic crisis was merely seen as a speed bump on the way to 13% growth. However, over the last six months the make up of the top line growth numbers have been called into question.
The People’s Bank of China has become increasingly hawkish throughout 2010. They are concerned that their economy is overheating and they are actively attempting to pop the bubbles that have been forming as a result of the bifurcation of the economic policies of the government relative to the economic realities of its people. The Chinese people have increased their savings as their country’s trade surplus has grown and their personal savings rate now stands at 38% of their income. By comparison, our national savings rate shifted from negative to positive as a result of the economic meltdown and now stands at 3.8%.
Chinese government policy does not allow direct investment in foreign markets. Therefore, they are unable to repatriate, on an individual basis, their dollars for foreign stock and bond holdings. The Chinese population has been putting their money to work by investing locally in property, precious metals and the Chinese stock market in an attempt to cover the spread between the 2.5% Chinese banks offer on savings versus their inflation rate of 5.1%.
In response to their swelling domestic asset values, the Chinese government raised interest rates twice this year and increased their bank lending reserves six times in 2010, lowering their banks’ leverage by a total of 20%. They are also lowering their lending cap from more than 9 trillion RMB, approximately $1.36 trillion, in 2010 to a target of 6.5-7 trillion RMB for 2011. It is quite clear that they are willing to take whatever action is necessary to keep their economy from overheating while maintaining their domestic cash hoard.
These actions are starting to show up in their economic data. The Organization of Economic Development is pointing to a slowdown in China’s leading economic indicators. They’ve based their prediction on the declining velocity of shipping, fuel usage, fertilizer production, raw steel manufacturing, capacity utilization and stock market turnover. Rising interest rates and slower turnover are key signs of a slowing economy.
Albert Edwards of Societe Generale recently stated that the economic prosperity in China is without global precedent. He went on to say in England’s, Financial Times and The Guardian newspapers that China’s, “investment to GDP ratio is off the scale both in terms of size and endurance.” His investment group has been the top rated global strategy analyst for the last seven consecutive years.
This year, it is quite possible that China sees annual growth of less than 10%. While this is by no means a recession, if their economy slows down 4-6% it will have a global impact. Based on their holdings and consumption patterns we could see declines, in order of magnitude, precious metals, oil, mid level luxury brands and global interest rates. The continued development of the Chinese middle class will continue to support food and agricultural prices as well as textiles. In the U.S. investors, “don’t fight the Fed.” The globalization of the economy suggests, “don’t fight the central banks.”
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.