The mere hint of a potential slowdown in the torrid growth of China’s economy helped shave a painful US$50 per oz. off gold prices over the past month, dropping spot prices into the US$380-per-oz. range.
Since 1976, when the Cultural Revolution ended, China’s real gross domestic product growth has averaged a scorching 9% annually, and GDP in the most recent quarter touched a world-beating 9.7% annual rate, provoking some to issue dire warnings of the boom’s unsustainability.
John Ing, president and CEO of investment house Maison Placements Canada, who recently visited the Middle Kingdom, says in a report that “such meltdown fears are overblown” and that China has “disproved these naysayers” year after year.
The last time Beijing attempted to engineer a gradual economic slowdown, in 1997, the effort resulted in a “hard landing.” However, Ing believes that the Chinese government’s present-day moves aimed at reining in growth, such as raising capital requirements for steel and real estate projects, are “more of a signal than actual depressants to growth.”
The reason for optimism is that China still has plans for massive spending on infrastructure to accommodate the demands of a growing population, so that, writes Ing, “China’s real problem is allocating its resources to where it needs them the most.”
With China continuing to be the fastest-growing economy in the world, “its voracious demand for everything from oil to copper is causing a spike in prices,” writes Ing, noting that China has become the world’s number-one consumer of copper, platinum, steel, zinc and iron, and its newly created middle class now exceeds the population of the U.S.
He predicts China’s foreign trade will top US$1 trillion this year, with exports rising 15% to US$505 billion and imports jumping 20% to US$494 million.
Of greater concern to North Americans, writes Ing, is how America, by becoming the world’s biggest debtor nation, “has unknowingly allowed itself to be governed by the newest superpower, China.”
China’s US$400 billion in foreign exchange reserves are now second only to Japan, and are invested largely in U.S. Treasury bonds — in effect financing a large part of the American deficit.
Warns Ing: “Should China slow down or alternatively decide to dump its bonds in favour of gold or euros, it would throw American financial markets into a tailspin, causing U.S. interest rates to skyrocket — and that is the Achilles’ heel of the American dream.”
He emphasizes that China’s hoard of 600 tonnes (19.3 million oz.) of gold accounts for only 2% of its foreign-exchange reserves, well below the 13% rate being maintained by its European counterparts.
“Given the development of China’s national economy, we believe China will moderately increase its gold reserves to 4-5% of reserves,” writes Ing.
Fourth-largest
China, of course, is more than a huge consumer of gold; it is also the world’s fourth-largest producer at 213 tonnes (6.8 million oz.) annually — behind South Africa, the U.S. and Australia (Canada has slipped in recent years to eighth spot).
While the roughly 1,000 small gold-mining operations in China could benefit enormously from the introduction of Western capital and technology, direct investing in China’s gold-mining sector remains difficult.
“Title, we believe, will be a problem for many,” writes Ing. “Other than in three provinces, China has also been reluctant to provide access to its producers — as such, foreign companies were left with ‘crumbs,’ such as refractory deposits, or had to look for gold in the frontier areas.”
Ing believes China’s gold will increasingly attract the attention of investors if the country allows access to its producers, and “only then will those elusive multi-million-ounce deposits be found.”
An investment in
“Although we do not question the existence of gold, we do not subscribe to the view that this is a viable multi-million-ounce bulk deposit,” comments Ing.
He throws cold water on some of the excitement surrounding
Stocks oversold
While not exactly bullish on China’s gold-mining opportunities, Ing is very bullish on gold prices in general and predicts they will enjoy a rebound underpinned by de-hedging, growing concerns about acclerating inflation, higher oil prices, and a lower dollar.
“Gold is an effective hedge, and investors would be wise to rebuild positions before the next gold rush to US$510 per ounce [this summer],” writes Ing. “We continue to recommend an overweighted position in gold equities, particularly during this pull-back. Stocks are extremely oversold and poised for rebound.”
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