How does China's economy affect the price of gold, and why should we care?
In his latest Buyside: International Commerce column, ‘Why gold is likely heading down: Blame it on the China price,' Avner Mandelman argues that because it's been selling its products below true cost (the China price), the country is “about to meet the fate of all those who sell below true cost: mass layoffs, upheaval and perhaps a change of management.”
“Why should you care?” Avner asks. “Because of gold.”
“Recently gold has been very volatile, and could tack on $50, or even $100, in the short term. But longer term, if inflation – already quashed by Freddie and Fannie's blow-up – is further squashed by China's punctured bubble, gold is likely heading down.
Globe and Mail columnist Avner Mandelman
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“Why? First, low inflation, even deflation, will lessen the need for inflation hedges. But second, and more crucial, as the West buys less of China's more fully priced products, and as China's cash needs escalate, its government, to feed the peasants and to maintain its power, will sell state assets - including gold. This, plus inflation, could push gold much lower than anyone thinks, perhaps to half its current price. How's that for a real contrary opinion?
In 1999, Avner Mandelman founded Giraffe Capital Corporation, a Toronto money management firm, to take advantage of the pending NASDAQ correction. Subsequently Giraffe was one of only Tech investment funds in North America to have made money through the tech bubble. Giraffe's specialty is “sleuth investing”– physical due diligence of companies.
Avner also writes about stocks and investments, both in Canada and the US, including Barron's. Among his books is The Sleuth Investor, recently published by McGraw Hill.
Avner joined us for a discussion. Thank you to all those who submitted questions, and sorry to those whose questions we didn't have time for.
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Claire Neary, Globeandmail.com: Thanks very much for joining us, Avner. Lots of people sent us questions, so we'll get right to them.
Shay Code from Canada writes: I'm curious about what seems to be a change in opinion regarding gold. In your column on Sept 27, you suggested gold would be a good inflation hedge versus holding cash. Your most recent article (which seems very prescient on the Chinese situation) seems to contradict your previous position. Your thoughts?
Avner Mandelman: Gold seemed fine until the latest data came in regarding China's economic situation -- it was worse than even I had assumed. And even though the Chinese economy is sinking, the Chinese are still supporting the price of some commodities to defend their domestic producers, which costs them hard dollars. For example, the Chinese government is supporting prices of copper, cotton, and some plastics, even as commodity prices have been plunging -- oil (halved), copper (ditto), grains (soybeans, wheat), corn, etc. etc.... everything is coming down. You may not be reading about this as you are reading about oil decline, but it's as important. Furthermore, there are record inventories grains and oil, etc., so when the Chinese sell their own inventories, the price will come down more, even as they sell their gold. Is it reasonable to assume gold will be the only commodity to stay intact?
James McLean from Saskatoon, Canada writes: One of the standard arguments made by gold bulls is that very low interest rates, unprecedented interventions by the US government in US markets, and staggering US debt will significantly devalue the US dollar. This will inevitably result in inflation, perhaps not in the near term as deflation continues its course, but after economies have stabilized. As I understand the gold bulls' argument, gold is the only hedge against fiat currencies that are poised to devalue rapidly. How does this argument square with your vision -- is China's gold hoard so massive that when it starts selling it off, this will counteract the inflationary flight to gold?
