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After several months of hibernation, I
am back and ready to start writing commentary again. Over the last several
months I have been busy writing a book on the commodity markets. This has
taken up most of my "writing time", but I am happy to report that
the book is finally complete!
Commodities For Every Portfolio: How To
Profit From the Long-Term Commodity Boom is a book that
I wrote primarily for investors who want to know more about why we are in the
midst of a multi-year bull market in commodities, the different ways of
participating in this commodity boom, and the various reasons for why
commodities, as a diversifying asset class, belong in a portfolio. You can
pre-order copies by clicking here.
Commentary
China has
been on my mind lately. Perhaps it is because I just recently finished
writing a book that touched upon China's voracious appetite for
commodities. Maybe it's because I am going to be speaking at a commodities
conference in China
in a couple months. Or maybe it's simply because the country seems to be
constantly in the news when it comes to its GDP growth, commodity demand, and
its ever growing record reserves.
Whatever the reason, I think that it is
evidently clear that China's
impact on this commodity market is substantial. In fact, China should
be on the mind of most every investor. I firmly believe that if most people
understood the magnitude of China's
commodity demand, they would more easily understand the characteristics of
this commodity bull market. In short, what happens in China will not stay in China. It
will ultimately have an impact on what happens in the commodity markets and
what happens here in the U.S. Continued commodity demand will lead a
continual rise in commodity prices. In turn, this will mean that you and I
will both spend more money on goods and services. This is why it is so
important to hedge your wealth against inflationary pressures.
Chinese Headlines
Aside from the more obvious headlines
about China's GDP growth
and record reserves, China
is also in the news when it comes to various articles painting the picture of
what is truly going on in China.
Here are just a few examples of some of the more recent news headlines:
China is on its way to becoming
the world's fastest growing wine market...
BMW's 2006 Asian sales rise to
record on Chinese demand...
Cartier Jewelry
expands into China....
McDonald's opens drive through in
Beijing...
China soon to be world's biggest
internet user...
African exports to China up
37%....
What you will readily notice about these
news articles is not only the rapid expansion that is taking place in China, but
how this expansion encompasses a wide variety of market segments. Whether it
is wine consumption, food consumption, gold jewelry
consumption or the purchase of a new BMW, the central theme is simply that
the Chinese are getting richer by the minute. Indeed, these headlines show
that it is not just the reserves of the Central Bank that is growing, but
also the reserves of the Chinese consumer.
Indeed, the growth of the Chinese
consumer is an often overlooked aspect of this commodity bull market. While
the first stage of this bull market was unequivocally pushed higher by the
demand for industrial materials, like copper, zinc, oil, cement, etc., the
second stage will be categorized by the growth and impact of the emerging
consumer( from China, India, and other emerging economies). As the consumer
starts consuming more goods and services, this demand will inevitably spill
over to the commodity markets that make or fuel those goods and services.
This concept, of course, should not be
too difficult to understand. The U.S. economy is primarily
consumer based. Greater than 70% of GDP growth comes from consumer spending
on clothes, housing, cars, luxury goods, food, and other items. In China,
however, consumer spending accounts for less than 50% of GDP growth. Imagine
what would happen if most of the Chinese consumers (not just the top echelon)
started spending like U.S.
consumers? With over 1.3 billion people, this demand would continue to be a
driving factor behind this commodity bull market.
Year of the Gold Pig
2007 is the year of the Gold Pig. Children
born in the year of the gold pig, which only comes every 60 years, are
supposedly( according to Chinese zodiac signs) going to lead a charmed life
and will bring great luck to the couple. Not surprisingly, Chinese hospitals are bracing
themselves for a baby boom in 2007.
But what does this mean for gold and
gold demand? Well, the first thing is that jewelers
in China
are already experiencing an increased demand for jewelry
and gold pig jewelry. This of course, is to be
expected. But beyond this increased demand for gold in 2007, Chinese
consumption of gold is also on the rise as citizens are now making more
money. In 2006, gold consumption increased by 17% even as gold prices
finished the year at much higher prices. In comparison, gold consumption in
the U.S.
declined by 10%. Not surprisingly, China
is now ranked 3rd in terms of gold consumption behind the United States and India. It is only a matter of
time until China overtakes
the US
in terms of consumption.
Gold Outlook
In my last commentary way back in
November, I stated the following:
"It seems that the 570ish level was
indeed a base, as gold prices have recently broken through the 612.50
resistant levels to climb above the $630/ounce level. At this level, I expect
gold prices to move up and down but I am confident that we are now back on track with gold. The recent move up broke the
downward trend of recent months. I would expect the 612.50 level to be a good
level of support and still would not be surprised to see gold prices have a
sharp rally to new highs before the end of the year."
Even though I have not had an
opportunity to post updated commentary, I do believe that the gold bull
market is indeed back on track. Gold prices have been especially strong in
the midst of volatile and declining oil prices. While oil prices have
generally moved alongside gold prices from a longer term perspective, the
last couple of months has signaled
a decoupling of gold and oil.
 
This once again points to strong
consumer demand for the shiny metal, regardless of what oil prices are doing.
While I do believe that rising oil
prices will have a positive affect on the price of gold, I do not believe
that it is the main factor. The declining U.S. dollar has been and will
continue to be the driving force behind higher gold prices.
As you can see from the above gold vs.
dollar chart, the gold bull market started as the dollar began its decline. Why
is this so significant? First, a declining dollar will result in Central
Banks diversifying out of their substantial dollar reserves. In fact, this
has already started to take place. Russia,
United Arab Emirates, and China are
just a few of the countries that have either expressed or actually started
the process of diversifying out of the dollar into other currencies and gold.
Since gold is priced in U.S. dollars, a declining dollar will also translate
into cheaper gold for citizens that own other currencies. In other words,
citizens in China and India will
now be able to purchase more gold for their "buck".
Where Do We Go From Here?
Phase II of this gold bull market is
well on its way. While the sell-off from $720/ounce was well warranted, the
gold market is now in a healthy uptrend that is primarily driven by
fundamentals, rather than speculation. In the next several months I expect
gold prices to retest the $720 high and would not be surprised to see it
break through that level with relative ease. With every passing day, the U.S.
dollar seems more and more vulnerable, geopolitical tensions continue to be
of great concern, and gold demand continues to rise all across the globe. From
a longer term perspective, I believe gold at these levels are at a great
value, and I believe that within the next couple of years (if not sooner) we
will finally see $1000 gold.
What is also important to keep in mind
about this bull market in gold and commodities, is that it not only presents
investors with a possibility to profit from higher prices, but it also provides
investors with an opportunity to hedge their portfolios from recessionary,
inflationary, and geopolitical risk. I am offering a free hedge analysis for
anyone who asks. You can contact me by clicking here.
If you are interested in learning more about the
commodity bull market, I urge to pre-order my forthcoming book, "Commodities for Every
Portfolio: How To Profit from the Long-Term Commodity Boom".
Emanuel Balarie
Senior Market Strategist
Wisdom Financial, Inc.
Direct toll free: 866-465-0017
International: 949-548-2021
Emanuel Balarie is the Senior Market Strategist at Wisdom Financial.
As an expert on foreign markets, foreign currencies, and the precious metals
industry, Mr. Balarie often speaks at public
engagements and his research is regularly published in investment
newsletters. You can find out more about Mr. Balarie
and his services at www.wisdomfinancilinc.com
The risk
of loss in trading commodity futures contracts can be substantial. You should
therefore carefully consider whether such trading is suitable for you in light
of your financial condition.
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