Sunday, October 02, 2011

Forget Greece, Forget Europe, Forget the US - This Week's Story is China & the Declining Copper Price

28 & 29 September & 2, 3 & 8 October 2011

Thanks to Bruce Krasting and the Business Insider for this story.

Mr. Krasting reports: "Entities in China have been using copper warehouse stocks as collateral for financing all manner of things for the past two years (L/C backed financing)."

I was driving today and listened to the financial news on Sirius (it's a great service).

Here's what's happening. The declining copper price is pressuring a multitude of financial deals in China - and forcing selling in the base metal (it's no longer working as collateral).

Another piece on the news today: Chinese project developers are failing to meet payments on newly-ordered equipment. Just caught this on the radio, and the story is hard to track online.... I think this is meaningful information.

This is early-breaking stuff, but the collapsing copper price is a shot across the bow. It's linked to the late-day collapse in North American equities today.

China will soon be the world's largest economy in purchasing power parity terms.

The Chinese central bank has been tightening (raising interest rates) for 2-/12 years.

The Shanghai index has been falling for four years:

Figure it out. Greece is small stuff, as are the PIIGS. The US financial crisis has been well-described. But, until now, China has been "bullet proof." However, the collapse in copper will tip a few more dominoes in China. It looks like a big story from here.

My guess, this is bearish for most all asset classes for now, including gold and silver (people and financial entities under pressure will be forced to sell to meet obligations, particularly as the copper collateral system is failing. Longer term, gold and silver will remain a preferred asset class - in a sharply narrowing field!

For the first time in a long time, we have a "Made-in-China" problem on our hands.

We had better get used to it. This is likely to become THE BIG STORY by the end of this year....

29 September 2011:

Copper is trying to find a bottom. Up weakly today. The action is certainly not decisive.

However, I have been reminded by Bill Fleckenstein that, as the Chinese have been tightening (raising interest rates) for 15 months, "if things start to get dicey in China, they will cut rates AND relax credit." So China has other options besides sailing off into the sunset if the pressure continues to build (I think it will).

However, China's way out looks very much like the course followed by Ben Bernanke and our friends at the politburo - er, sorry, the Federal Reserve.

Thus, by some time in 2012, if not earlier, we could see China, the Europeans and the US all "forced" (by political pressures, not by necessity) to re-enter into inflationary policies to avert collapse in the credit markets, interlinked defaults, and protracted unemployment.

Wonder how that may impact gold?

Well, for a start, plan to buy your gold on the Pan Asia Gold Exchange. Yes, by June 12, next year, China will be on its way to becoming a major gold-trading hub. And eventually, perhaps THE major gold-trading hub.... independent of LME, CME and COMEX margin hikes, etc.

Read about it here. This is an important story too. Very important.

Here is Pan Asia's official link.

Another story here (from "Gold Wars").

2 October 2011: OK. Goldman's Jim O'Neill says we may be way over-reacting to events in China. His words follow (thanks to Business Insider):

It is pretty obvious that you will have some failed property lenders, where a country’s policymakers deliberately choose to stop a strong rise in property prices before it gets out of hand like the US and Europe, as the Chinese have done in the past 2 years. I can’t understand why it therefore translates into a “hard landing”. The Chinese property market has some issues because of deliberate policy. In fact, it is remarkably impressive, and a huge contrast to virtually any evidence I can see from my days in the markets, that a policymaker would choose to prick a property bubble before it gets to the stage that we all know only too well.

China, as I have written about now for nearly a year, has entered a new phase of development where the quality of growth matters more than the pure quantity, and with it, the sustainability of growth.

This does make sense. Obviously Chinese policy makers are trying to slow things down, and it's working.

Even lower copper prices - not so good for the copper collateral system, but good news for builders everywhere... so long as it lasts - in an environment where inflation is originating from many places other than China!

3 October 2011: Patrick Chovanec, a well-known China authority based at Tsinghua University, acknowledges that China is tightening, but cautions that speculation and leverage could cause a greater than expect contraction, particularly in response to a global slowdown.

There are multiple indicators that speculative excesses are causing an economic crunch, including multiple business failures, "disappearing" and bankrupt executives, abandoned property development schemes, and collapsing valuations on mainland Chinese bank assets in the Hong Kong market.

So yes, China is reining in speculation. The question is if it is still timely to do so, or if the speculative excesses have already been too great.

Click here for Mr. Chovanec's analysis.

Oh yes, the copper price is still falling. Click here.

8 October 2011: This quotation from Marc Faber is going around. As seasoned readers will know, Mr. Faber, a Swiss National, has lived and worked in Asia for decades:

"The price of copper is signalling a very serious slowdown (if not complete collapse) in China. This is what is really behind the move down in all commodities. A hard landing in China would be devastating for the global economy. The Shanghai composite is making new lows along with copper, which is very bearish. Also stay away from the Australian and Canadian currencies. If China crashes, these markets will get massacred"

However, Bill Fleckenstein remains less worried, as China has many options before the onset of any collapse, beginning with interest rate cuts.

That is, the current developments are the intended effect of present Chinese policy, which is to slow down rampant speculation and market excesses, and it seems to be working.

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