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Commodity Bull Lives Because of China
In commodities, China is very much the demand side of the equation.
As they continue to grow in wealth and numbers, the Chinese hunger for commodities will not only continue but it will increase. This will not only result in solid support for commodity prices but will cause the increases felt over the preceding years to continue.
Evidence of China’s hunger for commodities can be felt as she routinely appears on price dips to buy. The need for raw materials in China is significant and the government understands that strategic stockpiles and investments in commodity-producing companies around the global will insure that the country has sufficient supply of these building blocks for the future.
Last night, I saw a very interesting news item. The bottom line of the piece: “China should divert some of its U.S. Treasury bond holdings into hard assets like commodities and energy assets, Zheng Xinli, vice president of the China Center for International Economic Exchanges, wrote in an essay.”
This is significant for the commodity markets. The article went on to say that every 1% fall in the U.S. dollar is costing China $10 billion. It did not say what a 1% rise in U.S. interest rates would cost the country, but lower U.S. bond prices and higher yields will certainly add insult to injury.
Zheng Xinli is correct — China needs these raw materials. He responded to criticism from central bank officials within his country that this type of move would cause commodity prices to explode higher… “A new multi-currency system is needed for the world economy, whereby the dollar, the euro, the yuan, the British pound and the Japanese yen would all compete in the global marketplace. Competition between the currencies would encourage countries to undertake stable monetary policies.”
As we all know, China has significant exposure to U.S. dollar assets. The dollar is in a downtrend and there is no reason to think that this trend will not continue over the long term. China is long U.S. government debt. With interest rates hovering around all-time lows with a gargantuan U.S. deficit, interest rates can only go higher in the long term. Internal pressure in China will force the government and Central Bank to work its way out of their U.S. asset position.
Additionally, China is a big long term short in the commodity markets. They are growing ,and they will continue to need raw material and commodity supplies over the coming decades as their society is in the building mode.
China is the demand side of the commodity equation today. They will be the demand side of the equation for decades to come. China has been buying commodities on all dips to add to strategic stockpiles and fuel their growing economy. When China buys on dips you should buy on dips. Both of my esteemed colleagues Jeff Opdyke and Eric Roseman always say, “Follow China.” Well, following China means being long commodities for the long term. The writing is on the wall and the arguments are coming from inside China herself!
Happy trade hunting!
Other Posts from the Author
- How to Profit from the Changing Chinese Diet - May 15th, 2012
- Emerging Market Demands Mean Volatile Food Prices Are Here to Stay - May 10th, 2012
- Who’s an Uncivilized Jerk? - May 7th, 2012
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