China just completed a census and based upon that census, reissued their GDP figures for the last decade. It turns out that Chinese GDP growth has been understated by the government figures for the last 15 years. For example, China grew by 10.1% in 2004 and their lowest growth rate in the last decade was 7.6 % in 1999.
Why does it matter how fast China’s GDP grew? In order for a large country to grow at these rapid growth rates, they must consume massive quantities of raw materials to build an infrastructure. China is not alone. Other fast growing countries like Russia, Brazil and India also lack infrastructure. They need tremendous infrastructure growth to continue to move into the ranks of major economic powers.
Everyone has consistently underestimated the growth of China. They have also underestimated the growth of India, Brazil and Russia. Accordingly, they have underestimated the demand for raw materials to build these economies. Further, they have underestimated the political influence that will be exerted by these newly rich countries.
A NEW INVESTMENT THEME
The major economic powers in Japan, Europe and the U.S. have also misjudged the desire of these burgeoning nations to have a voice in world economic affairs. In our opinion, a major new investment theme will be a desire for economic self-determination for these emerging, fast growing and highly populous nations.
As these nations continue to grow in economic and political power, they will chart a course away from the U.S. dollar and the G-8. They will move toward an economic future where more currencies have a role in the global economic system, and where governments, as part of their reserves, will hold larger amounts of precious metals.
HOW DO WE MAKE MONEY ON THIS NEW THEME?
We think that the arrival of new economic powers will create change. How do we profit from this change?
1. We buy foreign currencies and hold our cash reserves in currencies other than the U.S. dollar more of the time.
2. We hold larger positions in precious metals in our investment portfolios and for the reserves of national central banks.
We must remember that the economic discipline represented by precious metals will put restrictions on the behavior of politicians and bureaucrats. Politicians and bureaucrats do not like that at all. Those who like to bully others, using the U.S. dollar and G-8 economic power as a weapon, will see their power diminish. The representatives of the old order in government and in business, and those who have made money from the status quo, will not be happy.
WHAT ARE THE RISKS?
Those who are not benefited by this new economic order will fight back. What will they do? We can expect plenty of propaganda about how precious metals are worthless, and how the central banks of wise countries will sell whatever precious metals they own. Politicians and bureaucrats in the U.S. and Europe will say gold is a worthless relic. These countries quite possibly may threaten to sell their stockpiles of gold. They hate gold because their unfettered political power will be diminished as gold becomes more prevalent as an alternative investment to U.S. dollars.
If they are foolish enough to sell their gold reserves it will not be a long-term problem for holders of gold. There will be plenty of buying from Chinese, Latin American, and Russian governments and from individuals in India, Japan, North America and Europe, Australia and elsewhere. In other words the transfer of economic power will gradually come to reflect what is already happening on a business level. The new business leaders like China, India, Russia and Brazil are growing in power, and the old power block of Europe, the U.S., and Japan is diminishing in importance.
In summary, we have been repeatedly bullish on gold in print for four years and bullish on energy and commodities for three years. We never said bail out of gold because it could decline temporarily; instead we have used corrections as buying opportunities. We were bullish on foreign currencies in 2004 and after exiting from our foreign currency positions in early 2005; we reestablished them in late 2005. Nothing has changed except the understanding and appreciation of our views.
Should the great Jim Sinclair and others of us who have believed that the gold price would rise be concerned that larger numbers of people are now starting to agree with us? Now that people appreciate more what we have been saying, should we be scared that the acceptance of this view has become too great? Even though acceptance has begun it is still not widespread, especially in established seats of economic power in the U.S., Europe, and Japan.
We are not worried about the price of gold because the underlying economic, political, and demographic trends, which have given rise to these long held views, continue unabated. At any time gold, currencies and commodities can have price declines. In our opinion, however, such declines will be temporary. The underlying positive trends will not change in a day or even in a year. Thus, we remain confident that our long held views will continue to be correct. At some later date, it may be possible that a large percentage of the population will agree with us. At that time we will reassess our views.
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You can also read Monty Guild’s past periodic market and economic commentary articles by going to the Commentary Archive on our web site www.guildinvestment.com.
Monty Guild is Chairman and CEO of Guild Investment Management, Inc., a registered investment advisor. All material presented herein is believed to be reliable. Investment recommendations and opinions expressed in these reports may change without prior notice.