China will Dominate the Gold Market

Back in the maritime age, sailors referred to the equatorial waters of the Atlantic and the Pacific as the ‘doldrums’. It’s where the prevailing winds remained calm and the sun hot and humid. Ships would float aimlessly for days or weeks on end.

For the past few months, asset markets have been in the doldrums too. But now they’re coming out of the languid zone. The trade winds are picking up…

I’ll look at where the winds are coming from in a moment. But first, a few things you might be interested in…

On Monday night, our man on the scene in Auckland, Escapologist Editor Mike Graham, attended an event at Auckland Town Hall. Exiled freedom fighters Edward Snowden and Julian Assange joined journalist Glen Greenwald (via Skype) and entrepreneur/agitator/nuisance (take your pick) Kim ‘Dotcom’ to dish the dirt on New Zealand’s security services.

You can read all about it here. And if you like what you read, you can sign up for more. It’s free!

Why is it important for Aussie readers? Well, if New Zealand is spying on its citizens, you can bet that it’s happening here too. If you care about your personal freedom and believe that prosperity starts with personal liberty, it’s good to know how your government is chipping away at it.

Of course it’s all for our benefit…to keep us safe from terrorists, etc.

Ahhh that old chestnut…a line as old as despotism itself…

Which brings me to gold, an asset synonymous with economic freedom. Last week saw the China Gold Congress take place in Beijing. It was a three day event and China’s largest gold related gathering, with over 1,800 attendees.

As stated by the World Gold Council in their press release:

‘China is now at the centre of the global gold market – the engine driving the shift from West-to-East in terms of wealth creation, economic growth and gold production and consumption. The factors driving gold demand in China: a deep rooted pro-gold culture; an increasingly middle class population set to number 500 million by 2020; consistent economic growth and a supportive government, suggest that there is also significant room for further growth.’

China is on a long term path to dominate the gold market. Not only in terms of consumption, but in price discovery. This means building exchanges and infrastructure to compete with London and New York as global centres of gold price discovery.

This process is well underway, but it’s a little known story in the West. Gold, in the doldrums itself for years now, is well off the radar of Western ‘investors’. It’s unpopular and remains little understood.

As a contrarian, it’s a great time to attend a gold conference. So if you’re in Sydney, I invite you to come along to this year’s Gold Investment Symposium, Australia’s largest gold investment gathering. It’s on for two days this year — October 8th and 9th. I’ll be speaking on day two, along with gold market legends James Turk and Bob Moriarty.

There is a great range of speakers across the two days, and I’ll be particularly interested to hear from John Levin from ANZ bank. From what I understand, ANZ is a major player in the physical gold market in Asia.


Make sure you say G’day if you come along.

Righto…where was I?

That’s right…the doldrums…wind picking up…volatility…

In other words, after a few months of nothing…confusion!

Overnight, rumours surfaced (from the Fed?) suggesting no change to the language contained in the Fed’s soon-to-be-released interest rate statement. The market soared on the news.

How pathetic the market junkies have become.

In addition, word spread that the People’s Bank of China (PBoC) injected 500 billion yuan into the big banks to provide extra liquidity. This, predictably, got the market excited…Pavlov’s dog started salivating.

But hang on. Does an injection of liquidity automatically mean an increase in lending and further economic activity? I’m not so sure. China’s economy is slowing rather sharply. Driven by a slowdown in credit expansion, this usually increases demand for liquidity. (Think of property developers who need cash but can’t move inventory).

So the PBoC provides this liquidity to the big banks in the hope of easing some of the cashflow problems emerging in the economy. I could be wrong, but that interpretation makes more sense in the context of a credit induced economic slowdown.

I note that the iron ore price didn’t follow through on yesterday’s big gains on the news. This suggests a classic buy the rumour, sell the fact trade.

Speaking of iron ore, an interesting article popped up in last night. It quoted Managing Partner of J Capital Tim Murray. J Capital specialises in China research for institutional clients.

Every steel mill and iron ore trader we met in recent weeks told us that there will be no winter restocking this year. With weak domestic steel demand and no restocking, we do not expect a rally in iron ore prices this year. All this means that iron ore prices will be pushing lower.

While the iron ore response was tepid, those piling into the short Aussie dollar trade took a beating. The Aussie soared on the twin news of a still accommodating Fed and Chinese ‘stimulus’. But it just looks like a short-covering rally. The Aussie is already a little weaker in early trade today.

Which brings me to a point I made yesterday. That is, is a weak Australian dollar ‘good’ for Australia?
I think the standard answer is that, yes, it is. But given the poor structure of our economy (one dependent on continuing easy money and housing speculation) a weaker dollar could turn out to be very detrimental.

Of course, it would be great for commodity exporters and trade exposed industries, as a lower Aussie dollar increases competitiveness on the world stage. But a lower Aussie usually means a weaker global economy, negating some of that benefit.

A bigger issue is the potential inflationary impact of a weaker dollar. As the Australian dollar falls, the cost of imports rises. In effect, a weaker dollar imports inflation into the domestic economy. As you can see in the chart below, ‘tradables’ inflation (meaning imported inflation) is on the rise. That’s thanks to the weaker dollar.


On the left hand side of the chart is ‘non-tradables’ inflation, or domestic inflation. It’s persistently high…the result of an unproductive economy where easy money leads to persistently high inflation. If not for a strong dollar over the past decade, the average interest rate level would be much higher.

Domestic inflation is now falling a little due to softer domestic demand, but the weaker dollar is really firing up imported inflation. So if the dollar continues to fall significantly from here, and the economy continues to slow as the mining boom winds down, the Reserve Bank might not be in a position to keep pulling the interest rate lever.

That would be a good thing for the economy. It needs to wean itself off easy money and property speculation. But it could also result in an inflationary recession in 2015. This is why the Reserve Bank is starting to worry about the property boom. More on that tomorrow….


Greg Canavan+
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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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