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."


source: http://www.theaustralian.com.au/business/economics/faber-tips-tension-from-chinas-demand/story-e6frg926-1226572129326

Marc Faber interview Part 2

Marc Faber interview with MoneyControl.com

Q: Do you think this correction might be equal for markets across the world? The criticism of the Indian market right now is that it was one of the biggest outperformer last year, which is why it perhaps looks more vulnerable this year?

A: In general, I would be careful of markets that have performed superbly last year such as Turkey and Thailand. They are in my opinion, becoming slowly overheated. I am not so sure to what extend India is overheated because currency adjusted, we are still way below the peak in 2007.

But, in general I would argue you should buy equities when everything looks horrible and when investors cannot see why the markets would go down. That is the time to be careful because there is always something that will happen to send stock prices down.

Q: You have described two scenarios. One is a correction now and then maybe a grind of a year and the other one was a rally into summer and then a bigger correction. Which one would you assign a higher probability to?

A: If we had a very strong rally into the summer, as was the case in 1987, I would not then look for a correction. But, I would look for a very significant market decline to follow. However, the more likely scenario is in my view a strong rally into the summer. First, there will be a correction, then this rally and then a more significant top in 2013 which will not be exceeded for a while.

Marc Faber interview Part 1

Marc Faber interview with MoneyControl.com


Q: You sounded a bit cautious of late. Tactically, are you expecting a phase of risk-off in global markets anytime soon?

A: We had a huge rally since November and it has basically begun in March 2009 for most markets. I think that the markets are getting very frothy at present and whether this is approaching a longer term top or whether we have just a short-term peak, the correction remains to be seen. But, in general, I would be careful of buying indiscriminately in this market.

Q: Would you be expecting a 10 percent kind of correction in global equities across the board or do you think it may not be that deep?

A: Yes, we could easily see 10 percent correction. We have seen over 30 percent correction in Apple. So it is a reminder that stocks move up and they can also move down. My scenario for 2013 is either the market will make a peak relatively soon which will not be exceeded or we have a correction of a month or two and then another strong rally into August, such as we had in 1987 when the Dow Jones between January 1987 and August 1987 increased by 41 percent. However, it then lost 40 percent in two months.

I think there is a chance that in order to actually punish central bankers, markets would become extremely overheated and then crash.

Q: What do you think both outcomes are contingent on? Do you think it is the fiscal cliff issue that will be crucial in determining what happens to equity markets or something else?

A: I think that the global economy will be crucial and also what happens to China. Do not forget, if the Chinese economy does not recover or recovers for a while, for say a couple of months and then slumps again or decelerates significantly, it would have an impact on raw materials and in this case on the economies of the raw material producers or the resource producers of the world. We could have a shock for the global economy.

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