Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Pig Farmers and China Monetary Inflation Are Making Brent Nervous

Economics / China Economy Oct 24, 2009 - 04:28 AM GMT

By: The_Gold_Report

Economics

Best Financial Markets Analysis ArticleBefore getting into to the relationship between copper and pork products, I want to draw your attention to one paragraph from a commentary by Paul van Eeden that offers a contrarian, and undoubtedly unpopular view amongst the Kitco readership, of the gold market:


"Earlier we reached the conclusion that US interest rates could potentially start increasing and cause the US dollar exchange rate to strengthen, which, in turn, would cause the gold price to fall. We can now add that the massive inflation of China's money supply can cause the renminbi to collapse and send another currency crises rippling through financial markets. A collapse of the Chinese renminbi could also result in a stronger dollar and lower gold price."

Continuing with today's contrarian theme and what makes me nervous, have a look at these photos from China. They are excerpted from a China Central Television Channel (CCTV) program documenting private speculation and hoarding of metals throughout the country. According to an associate of mine at an Asia-focused hedge fund who was just in China, "It's pervasive; people are piling this stuff up in their backyards."

("It's pervasive")

Some of the more telling lines from a translated script of the CCTV program (which I assume to be accurate) include:
  • Wang Chao lived in Anxin county of Hebei province (rural area). He is in charge of a metal scrap collecting company. He used to purely take commissions for collecting scrap. Since 1H 2009, he started stocking scraps. He told CCTV his business now is like 'gambling.' Not only him, Mr. Wang said many people in his town have stocked a lot of metal at their home.
  • They told CCTV they believe the metal prices will 'certainly rise', and they have 'a lot of' stocks. For example, he said, in Laohetou county, every household has dozens to hundred tonnes of copper. Nobody wants to sell. They believe copper price will goes back to Rmb70,000/tonne from currently Rmb40,000/tonne.
  • Traders in Wenzhou city of Zhejiang province: A business man told CCTV, they use a lot of bank loans and bought a lot of metals for stocking. For one warehouse, he stocked at least 15 Kt to 20 Kt of copper. For his total personal metal inventories, he invested Rmb1-2 bn. He believe all metal prices will surge with inflation.
  • A non-ferrous metal warehouse manager, Mr Qin Baoqing in Wusong District of Shanghai. He said many metals cannot be put in their warehouse, so they have to leave them in the backyard. Many stocks have not been moved for 3 months now. For example, he said, they have many aluminium stocks from Lanzhou Aluminium, Guizhou Aluminium, etc.
  • He Jinbi from Maike (metal trading company). He told CCTV they saw many farmers in Guangdong province stocking more than 100 tonnes of aluminium at home. These people used to raise geese for living.
  • Because the interest rate is too low in China. Many farmers could make hundreds of RMB profits per tonne, with dozens of Rmb per tonne cost of interests. They use their existing inventories to borrow more from banks. Banks are very 'happy' to lend to them.
  • [a side bar here: China's 4 trillion stimulus package equals about 15% of GDP and according to the Financial Times, bank loans are up ~140% this year to ~8.6 trillion Yuan and official State investment accounts for 88% of GDP growth. What we are witnessing is Chinese savers experiencing negative real interest rates in their savings accounts: much worse than in the US. At the same time they are able, in fact motivated, to borrow money at rates that are less than the inflation rate. Hence, the massive government stimulus combined with unlimited cheap money has fueled a soaring stock market, real estate prices, and as presented here, commodity speculation. Approximately 60% of the stimulus money is estimated to have gone into these speculative sectors.]
  • On the other hand, many stock brokerage firms in China have become futures trading companies this year. Stock brokerage firms are very rich of cash. Private investors plus those brokers have at least invested Rmb20-30 bn in metal futures market. In 2008, only 50 bn Rmb were in the Shanghai futures market. This year, the number has increased to 80 bn Rmb. Everyday, he said, there are more money flowing into the market.
The CCTV program concludes, "Many speculations in metals have sent mis-leading signals to the government and disordered the market. The government should pay enough attention to it." (The Chinese version can be read here.)

(Making room for copper. These are the guys driving global markets?)

A September 17 Bloomberg story by Singapore-based Glenys Sim reports that "Private investors in China, the world's largest metals user, have stockpiled 'substantial' quantities of copper as the government ramps up stimulus spending to spur the economy." The article points out that pig farmers and other speculators have amassed in the order of 50,000 tonnes of copper. That is about half the level of inventories tallied by the Shanghai Futures Exchange.

As the chart below shows, commodity speculation is not a China-centric phenomenon. Since the beginning of the year, global fund flows into commodities have been strong estimated at ~US$12 billion as of October 9th.

(Weekly fund inflows into commodities and materials)

Combine the speculative fund and pig farmer holdings with the steadily rising copper inventories, as monitored by the London Metals Exchange, and the case can be made that if the copper price is ultimately a function of end consumption (toasters and Toyotas) there is little upside left in the price. In fact, if we assume that copper is a commodity and subject to the laws of supply and demand, the price should fall.

Now I do not know if Paul's thesis on gold is accurate or not: if it is it could still take many years to play out. Likewise, I do not know how or when the base metal prices will re-equilibrate to the reality of end demand—whatever that is. What is obvious is that gold and now base metals have become speculative investments that in addition to being bought as hedges against inflation and a falling US dollar are the latest get rich quick scheme. The end result is that absent the faith that metals and markets are all headed higher, we here at Exploration Insights are finding it difficult, although not impossible, to find value in junior mining and exploration companies.

Hot money on the other hand is not.

Over the past few months we have witnessed bought-deal equity financings for individual mid- to junior tier gold companies in the 10's to 100's of million dollars. These are being bought at nearly the absolute 52-week highs by funds that I know have not looked into the mining, metallurgical, social or political intricacies that make or break a mine. This fearless hot money jumping into the sector worries me. It always precedes a market bubble and correction: sometimes serious, sometimes temporary- sometimes by weeks, sometimes by years.

Adding to the absence of fear and proper due diligence in the market, my recent discussions with corporate financiers confirm that both large and mid-sized gold companies are being offered substantial unsolicited bought-deal financings—no questions asked. At the same time, some of the very same companies being offered the quick money are being hit with heavy selling when a fund manager becomes "concerned" because there has been no news for a couple of weeks or gold backed off $15.

Hand in hand with heavy fund demand for new metals investment ideas most of the major research firms have increased their commodity price assumptions to reflect the "new reality". The primary advantage afforded by the commodity price revisions is that previously overvalued mining companies can instantly become "Buys". Recall that the last major upward revisions from many of these same research firms came as the new reality of higher prices set in 2008.

The problem is that greed is driving the market and so any small hiccup or change in sentiment and the hot money tends to bolt. As last year taught us (remember last year?) when the fast money going in is the liquidity, there ain't no liquidity getting out.

I remain cautious and somewhat concerned by what appears to be hot and fickle money jumping into a sector that is apparently taking its cue from pig farmers.

That's the way I see it.

Brent Cook
www.explorationinsights.com

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

    The GOLD Report is Copyright © 2009 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The GOLD Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

dvdivx
24 Oct 09, 23:54
Even worse than real estate

When the average farmer dumps farming for hoarding metal you can tell it won't end well. If food prices go up or other prices they will have to sell the metal to cover costs. They would be better off sticking with pork or chickens, at least people need food.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules