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The Bullion Report For Oct 26, 2011: Big Fish

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Oct 27, 2011 2:35 am

Current headlines seem focused squarely on the economic situation in the United States and the Euro zone. There is no doubt that the lingering turmoil and the current plans to try to deal with and stimulate things are important. However, it would probably be a bad idea to forget that the demand picture for Asia might be at the helm of the Good Ship Recovery - let's take another look at the big picture from China.

[i]Past performance is not indicative of future results.

***chart courtesy of Gecko Software[/i][/center]

Consider the sheer size of China, and it is hard to imagine excluding them from any supply and demand talk. This goes for precious metals as well as any other basic commodities. From the CIA World Factbook, "in 2010 China became the world's largest exporter. Reforms began with the phasing out of collectivized agriculture, and expanded to include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, creation of a diversified banking system, development of stock markets, rapid growth of the private sector, and opening to foreign trade and investment."

Currently, China sits on reserve holdings of foreign exchange and gold totaling about $2.8 trillion. (1) This is just an estimate, of course, but puts them squarely at the top of the country rankings. China has more than double the #2 on that list, Japan. Curious about other things that make this Asian nation a powerhouse of potential consumption?  Their gross domestic product (GDP) is ranked third in a list of countries ordered by purchasing power. The only two areas ahead of them are the European Union and the United States. GDP growth was previously estimated at more than 10 percent for 2010. More recent data shows that through September, this rate has actually held closer to 9.5 percent. Sound bad? Side-by-side it looks disappointing, but when you consider that the US is closer to 2 percent and forecasts for 2012 are less than 3 percent it helps put things in perspective. China still has a lot to offer.

The global slowdown has tempered a lot of growth across the globe, but so far it appears as though China is going to remain fairly resilient. Recent data suggests that the economic outlook for China remains positive, but there are plenty of debates in the headlines as to the sustainability of their present growth. Some critics suggest that negative outlooks for other developed nations will drag on the Chinese economy. This is due to China's status as a heavily export-dependent nation. They make the goods and ship them overseas. If Europe and the United States continue to slow down - or at least remain stagnant - it will likely result in fewer people buying less from China. On the sharper side of the argument, there have been several charges that the Yuan has been kept artificially low to boost exports. That would speak to the potential for changes in monetary policies from the People's Bank of China.

Even more sinister is the suggestion that the bank in China pumped in trillions of Yuan worth of financing during the onset of the global economic crisis, something that kept their economy from dipping into recession but might have far reaching consequences long-term. Does that mean that the current rate of growth is doomed? Perhaps, but that might not eat into the overall demand picture.


I would suggest that people look towards the growing middle class in China - the rural-turned-urban populous that has so often featured in recent commodity demand analysis. Recession or no, growing manufacturing and diet changes could continue to propel the situation in China long after GDP has sunk closer to the levels seen elsewhere in developed countries. The outlook on a global scale may seem grim, but for gold bugs and precious metal enthusiasts there are still reasons to look towards bullion investments. On one side you have the shift towards alternative investments in an uncertain landscape. On the other you have the big fish like China and India that are still capable of massive amounts of consumption and demand, just by sheer population size and buying power alone. Neglecting this side of the world to focus on woes in the other is not recommended. If recovery is going to happen any time soon, it is likely going to be led by one of these areas. Any pick up in manufacturing activity, consumer spending or growth will likely be driven by their citizens.

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[b][i][u]Disclaimer:[/u][/i][/b] The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.