When the bubble in China pops, won’t commodity prices get crushed? Isn’t it counter-intuitive to purchase silver, like so many respected investors reccommend? Or does the ongoing situation in America far outweigh the malinvestments in Asia?
I mean it’s true that known supply has been decreasing steadily since the 1960s, but the whole Chinese ‘bubble’ makes silver a scary investment.
Is there something I’m missing here?
If Asian demand for specific commodies diminishes there will certainly be a correction in commodity prices, but this correction may entice investments from other world markets. I guess the point is where would you transition your money too that would not also feel the effects of decreases in demand for commodities?
As somebody that invests in commodities I will give my two cents. The vast majority of commodity prices will have a severe correction when China has a sharp slowdown or recession (which will happen because of the government-induced credit expansion). Going forward over the long-term though, China will become the largest economy in the world.
Why does China have such an influence on commodity prices? Jim Rogers spells it out in Hot Commodities on p. 103 by explaining that China is:
"No. 1 consumer of copper
No. 1 consumer of steel
No. 1 consumer of iron ore (used to make steel)
No. 1 consumer of soybeans
No. 2 consumer of oil and energy products"
So if China slows down significantly or experiences a recession which they in all likelihood will, then commodity prices will get hit hard. Gold will probably hold up well because it is predominantly a risk averse trade/investment, but if there is a broad liquidation across all asset classes gold will get go down as well (like we saw several days ago with the broad liquidations).
Silver, while used as money along with gold for 6,000 years, still has not decoupled from other industrial commodities. Silver prices will usually fall if the equity markets fall, whereas gold tends to rise. So if silver is still seen mainly as an industrial commodity, which judging by the current market it is, it will go down significantly if Chinese growth slows or goes negative. Keep in mind also that silver has been and will probably continue to be extremely volatile. Please don’t misunderstand what I’m saying though; I’m giving my opinion on what will happen if (when) China hits a wall, but long term I like silver. A substantial amount of my portfolio is in silver, I started buying it when it was just a bit over $10/oz.
Commodity currencies will also probably get hit such as the AUD, RUB, BRL, etc. I’m not sure what China’s near term future will look like, but as I understand it the property bubble there is in urban and coastal real estate and it is not completely tied in to nearly every single household and institution like it was here in the US. I’ve been shorting US stocks since late April, and I’m short REITs and all my long positions are commodities at the moment. I’m not buying any more commodities until the equity markets tank (again) and I don’t plan on covering my short positions until the S&P hits 850. When this happens and people panic commodities will get sold off, and this may be the buying opportunity you’re looking for with regards to commodities and not to mention a good entry point to short Treasury bonds. Feel free to post a reply or message me if you have any more questions.
Best regards,
Chris