More and more nation states are eager to trade paper money for tangible assets. The economic reason is obvious. All nations have economic needs which can only be met by resources like oil, food, steel, water, and other commodities. Now that the global marketplace is open to all customers, you see a whiff of panic stockpiling in the resource markets. It’s not a flat-out-fill-the-grocery-cart-with-water-and-batteries-and-rush-the-pimply-faced-bag-boy-blocking-the-door kind of panic. But it’s bullish for resource prices, and about to get more so.
The Institute of International Finance reports that the six Persian Gulf States of the Gulf Cooperation Council now have more combined forex reserves than mighty China. Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates have a combined US$1.6 trillion in forex reserves. Now, what will they do with all that money?
First, they will probably do what anyone who has won an oil lottery would do, hire an asset manager. Financial and banking services are probably good investments in the Middle East. Exchanges too.
But beyond the money shuffling business, what will the Gulf States do with those sovereign wealth war chests? Invest in Africa? In more domestic infrastructure (this favours Aussie firms like Leighton and Transurban)? Or is the simplest strategy to accumulate resources directly, buying farmland, mines, and tangible assets the world over?
South Korea has adopted a strategy of accumulating resources directly. Bloomberg reports that “South Korea, which imports almost all its energy and mineral needs, plans to invest 5.2 trillion won (US$5.6 billion) developing oil fields and mines overseas to secure supplies amid rising prices and competition.”
“Asia’s third-largest economy will make the investment by 2011, the Ministry of Commerce, Industry and Energy said today in an e-mailed statement. The spending includes money for state-run companies such as Korea Resources Corp. and Korea National Oil Corp. as well as government loans to private companies.”
We wonder if government bureaucrats will make good capitalists. Will state-run investment firms do a good job of generating a real return (better than bond yields) on all this global cash? Then again, we wonder if capitalists even make good capitalists.
Where are all the good investments seeking capital? It could be a case of too much money, too few good projects. Or, it could be the case that so much money makes projects possible that are not economically necessary. That is, the world may be overindulging in a productive capacity build out. This would lead to global overproduction, which was the backdrop to the Great Depression in the 1930s and deflation, where there was too little real cash and too many real goods.
But that is probably a nostalgic, American way of looking to the future by comparing it to the past. There is something different this time. And that something is the emergence of billions of new customers all over the globe. And that means global production will continue to demand raw materials. Things like coal, copper, iron ore, and zinc. You know, those things Australia has.
It will also require a lot of energy. And that may be about the only limit to growth right now—an oil crash. We’ll have more to say on that tomorrow after we’ve seen the oil crash doco tonight on Lygon Street. Until then…
Markets and Money