Chinese Fortunes: Secure Your Wealth in Commodities

With the ongoing recession looming over the US and foreign economies, China seems to be coasting through with continuing growth through their exports. This trend does not seem likely to continue in the coming months.

Below I will explain why and what steps you can take to secure your investment portfolios.

A couple of weeks ago I was in Hong Kong attending the Roskill International Rare Earths Conference. I was “only” in Hong Kong, or “China Lite,” as one jaded acquaintance put it. There’s just no pleasing some people.

It’s as if the new airport, new bridges, new roads, new train station, new buildings and hustling, bustling, export-driven economics of Hong Kong just don’t tell you enough. No. By some peoples’ standards, you have to see the new airport, new bridges, new roads, new train station, new buildings and hustling, bustling, export-driven economics of Shanghai if you really want to experience the China story.

Hong Kong offered plenty of stimulus for one long trip. So do I have any takeaways, besides a couple of nice suits from my new Hong Kong tailor? You bet!

Over the past 20 years, the key enabler of China’s development was strong, export-led growth.

With Hong Kong handling much of the cargo, China exported its way to dramatic prosperity, fueled by boatloads of imported Western currency — dollars, yen, euros, etc. But that good fortune, and easy money from overseas, has come to a screeching, grinding halt.

The global financial crisis has moved in for — apparently — the long haul. Here in the United States, we’re not enduring a typical, post-World War II, run-of-the-mill business cycle recession. It’s not just the economic equivalent of a “standing eight count” in boxing. No, I’d say that the U.S. economy is hard down on the mat.

Indeed, I believe that the current U.S. economic situation is far more grave than even the much-advertised Great Recession. When something recedes, that implies that it’ll come back. If something recedes a lot, then it should come back in a big way, right? Thing is, I can’t see how the U.S. economy will come roaring back in any big way, and not anytime soon.

During a U.S. recession in the olden days, for example, businesses would lay people off from a plant and then call the workers back when times were better. Today, businesses have laid people off, but then, in many instances, closed the plant for good and sold all the machinery for scrap. Under these circumstances, there won’t be any recalls.

And if history is any guide, the United States cannot have an economic rebound without something like a recovery in housing. That’s not happening, what with the banks still broken, lending stingy and the mortgage industry a total mess.

Nor is there significant evidence that other Western economies are poised for a major comeback. Really, which other economies are rebounding? Ireland? Italy? Britain? Japan? Nope. Even the mighty German economy isn’t growing fast, and they brag about it.

So looking ahead, where’s the continuing export-led growth for China? How can past patterns of trade and prosperity continue for China — and, by extension, for Hong Kong? Or stated differently, what does this mean for the future?

It’s likely that the slowdown of external demand will throttle back China’s ability to grow at its recent, historic rates. But is the Chinese leadership prepared to process and adapt to this new reality?

In the best light, the decline of foreign demand means the Chinese should channel less investment into their export model. The Chinese should redirect more investment toward internal consumption.

That’s easy to say. But will this happen? Can China internalize its growth? Well, to be fair, it’s already happening to some extent. Many China-based operations — for example, companies like Foxconn and Toyota — are paying Chinese workers higher wages. This translates into more purchasing power at the Chinese grass-root level.

But then we’re also seeing stories about raging inflation in prices for food and energy at the Chinese retail level. And the vast multitude of Chinese people without the pay raises, who do not work for foreign companies, are stuck with the inflation as well.

Point is, there’s nothing easy for China in making the transition from massive investment in formerly booming export-led growth to a new focus on internal consumption.

I believe that there’s a still lot of thinking and planning in China that’s stuck in the mind-set of economic boom times from the early part of this decade. We’ll probably still see gross overinvestment in obsolete economic ideas coming out of China. Entire industries will pursue growth and expansion in markets that are no longer there. The world will face the consequences of resources filtering through a trade model that’s no longer valid.

So what does all this mean for investors? Well, it means that there’s even less reason to trust in national currencies over the long haul.

Sure, the local currency is how you keep score. It’s what you get paid in. It’s what you use to buy a house, pay bills, buy groceries, take a trip, etc. But looking forward, in any and every currency, inflation will nibble away at your wealth and savings.

What can you do? You can’t change the world, right? No, but it gets back to that idea that you still want to own physical gold and silver as core holdings in your portfolio. For the past couple of years, I’ve been saying “5-10% in precious metals, or more if it helps you sleep at night.” I’m going to change that to “At LEAST 10% in precious metals, or more if it helps you sleep at night.”

I believe silver is probably a better play right now, with more upside than gold. I’d go for silver coins, without seeking any numismatic value. Just go for the Silver Eagles — bullion value — or any other high-quality metal issue from reputable mints.

Until we meet again,
Byron W. King
Penny Sleuth

December 1, 2010

Chinese Fortunes: Secure Your Wealth in Commodities was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

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