December 21st, 2009
11:31 AM GMT
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You have to admit gold has kind of stolen the show in the metals sector this year. The traditional safe haven investment raced to settle at a record price of $1,218.30 an ounce in early December. Now prices have fallen off somewhat since then, but the gold bulls and the gold bears are still arguing it out over when we might see $1500.

In all this gold rush though, you may have overlooked the significant gains in other metals. Here are a few to watch in 2010.

Platinum: Platinum prices have made solid gains this year, but some analysts say the precious metal could have more room to grow. Used both for jewelry and industrial purposes, constrained supply is an issue.

Copper: Prices for this industrial metal more than doubled in 2009 after a difficult 2008. Copper watchers expect demand for the metal will continue rising as global economies pick up in 2010. Copper is a key component for building projects, autos and electrical wiring, so it is an essential resource for quickly growing countries like China.

Steel: More, more and more seems to be China's attitude towards steel at the moment. Still the outlook for this essential building material is far from certain. Fitch Ratings predicts in a recent report that demand will recover at a "modest pace" over the 12-18 months, but says high stocks and excess capacity should limit price increases.  Morgan Stanley believes such overproduction should recede though and higher prices are on the horizon, driven by rising raw materials costs and China's booming property sector.



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soundoff (One Response)
  1. shan saeed

    I wanted to share this research piece with you. I read your comments about China's strategic move to diversify their assets and get insurance of its reserves. The Chinese government is doing an extraordinary thing... something nearly unheard of in the modern world. They have surpassed South Africa as the World Biggest producer. It is encouraging citizens to put at least 5% of their savings into precious metals. On Sept 10, 2009 a major wallstreet news paper reported this finally. The Chinese government is advocating its people gold and silver are good investments that will safeguard their wealth. After last year's meltdown in the stock market, people believe it. After all, Chinese citizens don't receive government retirement money... and they don't have company pension plans like people in many other countries do.

    China has gone crazy for gold. In April-2009, for example, the government's Foreign-Exchange Agency announced the purchase of an additional 16 MILLION ounces for state coffers. Behind the scenes, in a move that has gone almost completely unreported in the Western press, the Chinese government has created a gold investment that could dwarf the returns of gold bullion, ordinary gold stocks, or any other type of gold investment you've heard of before.

    The Chinese attitude toward gold and silver is a striking contrast to the American attitude right now. I don't recall a TV or radio ad from any congressman or President Obama encouraging US Citizen to buy gold or silver. Does your bank sell silver bars? Are gold mints popping up in your neighborhood? Are any of your friends, family, or coworkers scrambling to buy precious metals?

    In spite of a few ads on television and satellite radio, buying gold and silver in the U.S. is still largely seen as a fringe-group activity. That's not the case in China. And in the big picture, there are three distinct trends occurring in China today that many in the Occidental world are not paying attention to. I have observed these strategic trends about China

    First, look where China stands as a gold-producing nation. In 2008, China produced 9,070,000 ounces of gold, exceeding all other countries. Further, its production continues to rise, while many of the top-producing countries are in decline.

    Second, China had the lowest per-capita gold consumption of any country over the past half-century. But depsite that, In 2009, they have already surpassed in demand for gold as compare to India. In other words, they'll also become the world's No. 1 retail buyer.

    Third, the Chinese government has been using its foreign exchange reserves to buy gold – a lot of it – and doing so on the sly. This past April, Chinese officials made a surprise announcement that they had been secretly buying gold since 2003, increasing their gold reserves by 76% to 33,886,000 ounces. The Chinese government now owns 30 times the gold it held in 1990.

    What would happen to the gold price if China increased its gold reserves to just 5%? What about 10%? To overtake the U.S. as king of the gold hill, it would have to buy all the gold held by the governments of France, Italy, and Germany combined. Can China really do any of that?

    At $1,000 gold, to push China's gold holdings to 5% of reserves would take $55.3 billion; to 10% would cost $144.4 billion; to be the world's top gold dog would run $227.6 billion.

    Chinese reserves are approaching $2.4 trillion, of which almost 73%, or $1.67 trillion, are denominated in U.S. dollars. The cost to become the world's biggest holder of gold would be a pittance compared to the amount of money China has available. In other words, money is not a problem.

    Combining the country's massive holdings of dollars and the very real likelihood those dollars are going to lose much of their value, the motivation to buy tangible assets is urgent.

    Further, keep this in mind: China's reserves continue to grow. Therefore, the country must continue buying gold (or consuming its own production) just to maintain the small gold-to-reserves ratio it has, let alone increase it. In addition to the government buying precious metals, Chinese citizens will continue gobbling them up, too. Demographics alone tell us why.

    Government statistics show the average urban household in China has about US$1,300 in disposable income. Multiply that by the number of urban households in China and you come up with roughly $36 billion in available capital.

    According to precious metals experts, about 9.5 million ounces of gold will be turned into coins this year (including "rounds" and medallions). At $1,000 gold, that's $9.5 billion, or only about one-third of the capital available in China.

    The number is more striking for silver: Total coin production this year is expected to hit 35 million ounces, equaling $615 million or just 1.7% of the available capital in China. Of course, a lot of Chinese people want cars and refrigerators, etc., but it won't take much of a shift of this capital into gold and silver to have a major impact on the global retail precious metals market. It may already be underway.

    And long-term projections show the demographic trend won't slow down: The middle class in China is expected to increase by 70% by 2020. So over these next 10 years, more Chinese and more money will be coming into the precious-metals markets, all at a time when inflation is almost certain to be high, adding to gold and silver's appeal. Couple this with China's long-standing cultural affinity for gold, and you have the makings for a potentially life-changing gold rush.

    Shan Saeed
    Economist
    Uni. of Chicago, Booth School of Business Graduate
    Chicago/Singapore

    January 2, 2010 at 6:05 am |

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