Thursday, February 21, 2013

China Commodities and Gold

CHINA'S demand for commodities is set to level out in the coming years, famed contrarian Marc Faber has warned, while China's ongoing reliance on commodities imports is likely to add to geopolitical tensions throughout Asia, the Middle East and Africa.

Dr Faber, the author of the Gloom, Boom and Doom report and a regular speaker on the conference circuit, told the Mining Indaba forum in Cape Town that credit growth in China was beginning to grow at a much faster rate than growth in gross domestic product, with potentially negative implications for commodities demand.

"I think oil consumption in the world will continue to go up, but for some industrial commodities like iron ore and copper, China has probably reached a level where demand may not contract, but won't go up dramatically," Dr Faber said.

Sporting his trademark ponytail and a bright pink tie, Dr Faber noted that while credit in China had grown at about the same rate as GDP between 2000 and 2007, since 2008 credit had grown at a much faster rate.

Much of that credit growth had been "misallocated" into an overinflated Chinese housing market, potentially sowing the seeds for a future economic crisis in the country.

"I think they (Beijing) can again postpone a crisis, but this is probably the last time they can do it. After that, economic growth will come under a lot of pressure," he said.

"I would assume that the Chinese economy will grow at a much, much slower pace in the next 10 years . . . and this will have an impact on the demand for raw materials."

Dr Faber also said he was concerned about the geopolitical implications of China's reliance on oil imports through the Straits of Malacca and the strategic vulnerabilities that come with that.

"What would you do if you were a military strategist in China and you knew all the oil (being imported into China) comes through the Straits of Malacca?"

He warned of rising tensions throughout Southeast Asia, the Middle East and Africa as China looked to shore up its commodities supplies and delivery routes.

"I think there will be on this continent a lot of struggle over resources. We have to live with a lot of volatility," he said.

Dr Faber repeated his long-held belief that money-printing by governments around the world made gold a must-have investment. "I would have 25 per cent (of my investment portfolio) in equities, 25 per cent in bonds, 25 per cent real estate, 25 per cent gold and 25 per cent cash," he said.

"I know it doesn't add up, but I have now the accounting standards of US Treasury."

He said investing in gold and other precious metals was vital. "I would strongly advise you, for your children and so forth, don't keep your money in cash. "I'm not saying rush out the door and buy gold, I'm just saying that over time it's likely that, as has happened throughout history, paper money has always lost value."