China to build 200 cities for one million people each over next few years! Imagine the metals that will require and the LME is near empty!
Silver & Gold Demand to Soar
By Neil Charnock
October 31, 2006
www.goldoz.com.au
More about fundamentals today…
There is an important addition to my base and precious metal commodity thesis which I have covered during the past few weeks. China is planning to build 200 new cities for one million people each. This is a massive undertaking within the next few years, on present form I do not doubt they will do it. 200 new cities, China certainly has some momentum here and obviously intends to maintain it. Curiously momentum is measured scientifically by multiplying mass x velocity, in this case we have $2.2T (considerable mass) x 10%+ (now that’s what I call growth velocity), this simple formula adds up to one thing... DEMAND!
Two hundred million more Chinese residents into cities is a major historical movement, it is two thirds the population of the US and ten times Australia. One can not underestimate this, not that long ago (in historical terms) this would have been 20% of the whole population of earth. Japan, Korea and other developing economies went through “modernization” before China; this is nothing new, what is new however is the scale. 200,000,000 is a lot of people even in whole world “relative” terms.
This point does not need a graph; 200 more cities for 200 million more urbanized consumers. We are talking about a China with an urban population of over half a billion people and they will have a GDP roughly equal to Japan once they achieve this. The other really interesting thing about China at present is that the transition to internal consumption has been increasing and they are still churning out the infrastructure at a fantastic rate.
Developing economies follow a general pattern where infrastructure leads to internal growth and prosperity and China is only somewhere in mid cycle. Their infrastructure roll out is far from over and yet internal consumption is gathering a powerful head of steam in global terms, already with 300,000,000 consumers. As pointed out in a previous article the mathematics of compound growth at 10% per annum showed that this is proportionately more significant that the number indicates. Growing off a small base at a high rate is an easy trick yet growing a $2.2T economy (end 05 figure) at 10% is something the world has not seen in the post war modern era, if ever. Growing consistently at 10% off a high base, year after year will have an even more profound effect.
Gold and Silver Demand
Do not forget China has not standardized gold and silver retail infrastructure as yet, this will take shape over the next few years fueling massive new demand. Do not forget China has an ancient rich culture which embraces gold and silver ownership in a way the West does not understand. As the three forces of increasing average earnings, cultural affinity for precious metals and a standardized retail distribution network join together we will see a triple wave crest which will drive PM demand through the roof.
The Chinese Government and wealthy Chinese are extremely astute and this would not have escaped their attention. It is not their biggest consideration as they manage their economic plans, yet it will be on their agenda make no mistake about that. Wealthy Chinese insiders are probably loading up at current historically cheap levels, gold investment increased by 20% in China last year.
The weekly gold chart as shown above is not adjusted for inflation and without an understanding of the market forces which pushed gold below $400 per oz in the late 90’s one would be forgiven for thinking that gold has just enjoyed a massive rally. Without central bank sales and derivatives being used to sell vast amounts of un-mined gold forward we would not have seen the dip from 1996 to 2001. Call this extra-ordinary market forces if you like but make no mistake they are an anomaly in the history of gold, this is a distortion.
For that matter you may consider the overly dramatic rise from 1977 to 1980 was also distorted because the price of gold had been fixed for 4 decades. This is a highly political metal and is still of great interest to mankind. At the start of the chart on the left you could buy a house for $20,000 in Melbourne Australia. How things have changed.
As this gold bull moved from artificial lows in the late 90’s we saw each new consolidation phase occur at higher and higher prices levels. It is all relative, and back in 2002 we would have thought $600 to be a sky high price for gold… and silver bulls would have been overwhelmed with joy to see $11 as a new base. Yet today these prices are relatively cheap compared to recent highs. Recent highs will look just as insignificant as the early 2003 Gulf War influenced high of $370 does today as we look back in a few more short years. At the time I remember clearly how huge that peak looked… at least on the day chart, not long term. Was gold expensive at $730 earlier this year, yes it was relatively… but no, not when adjusted for inflation. As we look back at the early 2006 peak it will most likely look the same as $370 does now.
No matter what this distorted chart of gold shows, these are currently cheap historic levels for gold… at a current inflation-adjusted rate this “give away” price of gold is only $600 / 2.3 = $260 per ounce in 1980 $ terms. Silver is currently trading at US$12 or US$5.20 in 1980 inflation adjusted terms. I view these inflation adjustment calculations as very conservative @ 2.3x because they are the official figures. Once the “powers that be” in China are ready the Government will increase gold holdings within their projected foreign reserve balancing act, then the retail roll out will get a head of steam and the demand for precious metals will be driven like never before in our lifetimes. This seems to have commenced.
India, Russia and Brazil will be taking up the infrastructure roll out slack behind them going into their major infrastructure tipping point where we all gasp about their growth. India has only just moved up to the half a trillion GDP club and yet to gather highly significant commodity consumption. She is a sleeping beauty just like China was… past tense. India is well and truly on the move and even if it never reaches the development extremes of China it will still have a significant global impact on demand over the next 10 years at least. Gold and silver are even more important in this culture than China. As wealth and consumption grow in India we will see ever growing PM demand to take up the slack whenever process dip as Indians are extremely price sensitive. Therefore the dips will see support from this geological area.
The Gold Dinah has not gone away either. There are still rumblings in the Middle East about trade in gold instead of USD for oil which would be big news for gold. The silver Libertad is not going away either, this is a natural progression for Mexico due to their financial history and large silver production base.
These stunning metals are extremely rare having been formed in the stupendous pressure and heat of a supernova, during the explosion of an ancient massive star. Gold and silver were created in exceptional circumstances and quite ironically they perform best in exceptional circumstances.
Timing is another thing and we have to do our best to read the secular trends and fundamentals to monitor for changes. Technicals assist us to time our entry and exit points however remember this, one of the main considerations to own these metals is for their value in extreme financial circumstances… as insurance. We could be sitting right on a break out in the metals right now and await this outcome. They are the truest store of wealth over time, those of us in the “know” understand this to be an absolute “no-brainer” of an investment, this is our firm opinion of course.
Other fundamentals include feedback I am getting about industry bodies, great projections… Suppliers, powerful demand and great projections… Companies, still struggling to source mill equipment etc…
Last general comment today… gold and silver markets are very small compared to other market sectors. Global gold and silver warehouse stocks, shares in companies that mine these very special metals are very tiny compared to other world markets. Any rush to this unique asset class will cause a significant price spike, there is no where enough gold to cover demand when this gets going. As this stage two bull emerges from this initial correction we will see renewed global interest and investment. Money will flow towards quality stocks in low sovereign risk mining centers; valuations can only go so high in Canada and the USA before the value seeking overflow hits destinations like Australia. The effect would be immense.
ASX Update…
I just analyzed the graphs of our top 35 ASX companies involved in PM mining activities. I have been strong with my analysis stating they were poised and so forth over the last several weeks and it is useful to check the accuracy of my work. Remember we have seen a false breakout in gold and silver and a commodity scare as the heavily altered CRB Index broke uptrend support. Copper has held at a very high historical level and zinc has powered. At first the larger stocks did behave as expected / projected and profits were taken because they had enjoyed a good run. Once this occurred I then noted the correction was “in” …and things have since improved. Strong rally has indeed started in many stocks during this POG correction.
The figures are interesting; Out of 35 stocks we have seen 14 stocks in clear strong uptrend, 7 diverging and have started to turn up, 8 in continuation of base with divergences indicating breakout is imminent, 1 just dipped below it’s base, 4 are in a down trend or broke down for what ever reason and 1 is flat with no divergence.
Many smaller and mid sized stocks have broken to the upside in a repeat of behavior similar to H2 2003. This market is not behaving like the POG is about to drop substantially and it is not behaving like we are going to have a boring time the next several months either. I miss full time trading at times like this and had better hurry up and hire some staff soon so I can get back to it.
I apologize I have released my article a few days late this time, there is a good reason. I try to keep to my word and I had mentioned that I would release my new web site for Australian precious metals stocks by October and I have been pressed. Unfortunately my first web site partner had to pull out of the project due to work and private pressures and he is greatly missed… however we have made it. I am now working with a small specialized team that is investment and trader based which is where we wish to specialize.
This new Australian site is under construction and the educational content is not up yet, this will follow over the next several weeks. The aim is to bring precious metals awareness up in Australia and to assist all global investors to find great Australian investments. The name is GoldOz, Oz stands for ounce and also can also represent Australia (the land of Oz / Aus)… address is www.goldoz.com.au and we can be contacted on info@goldoz.com.au .
Our mining research lists are available in the GoldOz store and more services are on the way. We have a special deal on offer on this research at present where we update and send again in the next two weeks and a full discount will apply on the upgraded product on the top producers in Australia. The site has a PM Stocks page with a large list of companies with web site links for Australian stocks which is a free service if you have the time to do this research yourself.
Good trading / investing.
Regards,
Neil Charnock
Email miningres@eden.net.au
*****
Neil Charnock is not, and does not claim to be an investment advisor. The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are my current opinion only, further more conditions may cause my opinions to change without notice. The insights herein
|
