29 September 2011

China's 'resource imperialism' a risk for Australia: James Dines

Leading American investment analyst James Dines has criticised Australia for allowing China to buy large swathes of its natural resources in what he calls "resource imperialism".

Australia was in danger of squandering it's "irreplaceable inheritance ... traded for easily printed paper", Mr Dines said.

Mr Dines, the keynote speaker this week at the RIU Victorian Resources Roundup conference, told an audience of mining executives, brokers and investors that the end of capitalism as we knew it had arrived and that we were in the second great economic depression.
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His entertaining, if alarming, speech would have prompted mixed feelings among a crowd that included executives with a strong Chinese presence on their share registries.

State-owned Chinese companies are also becoming a major foreign investor in Australia.

Mr Dines, editor of the Dines Letter and author of numerous books, described natural resources, including farmland, as a source of real wealth that should be kept for "your descendants".

By pursuing resource imperialism, China was building stockpiles of commodities well above its immediate needs, such as rare earths - it already produces 97 per cent of the world total - and copper.

The Australian Foreign Investment Review Board blocked a $252 million bid by state-owned China Nonferrous Metal Mining to acquire Australian rare earth miner Lynas in 2009.

China's motivation

The world's most populous country wants to secure its resource needs for centuries to come.

Instead of seizing the means of production, as Karl Marx advocated, the Chinese Communist Party was legally buying it in what Mr Dines believes is the end of capitalism as we know it.

"They are not buying a copper mine to re-sell at a higher price. They are buying it to use all that copper for China," he said.

"China are storing (commodities) as a form of hard money for next century and beyond."

Mr Dines said he was not being anti-China.

"What they're doing is legal and far-sighted thinking."

He contrasted that with the US, where investors were fixated on quarter to quarter earnings.

Currency collapse

In contrast, the US and Europe had not learnt from history and had brought about a second economic depression by incurring massive debts and trying to make repayments by printing more money, he said.

He believes it will ultimately lead to the currency system collapsing.

The doubling of the money supply to pay for World War I led to inflation in the 1920s and the Depression of the 1930s, he said.

Mr Dines says what's needed is a currency linked to gold stores to limit printing.

America's government debt will swell to an estimated $US20 trillion in the next nine years was, something it will never repay, he says.

China currently holds $US3 trillion in foreign exchange assets and could "buy the whole world".

So, how should Australia and the world respond to this new world order?

The prevailing view here is that the mining boom is a great thing and will last indefinitely, with a rapidly urbanising China and India buying our resources.

But Mr Dines points out that heavy demand from the developing countries of the world will put a strain on finite resources, with oil certain to run out this century.

He says Australia should ensure that a percentage of all mines and farmland is kept in Australian hands, to protect the country's food and resource security.

High food prices prompted violent social unrest in the Middle East this year.

He also recommends relying less on mining and more on renewable industries such as tourism, crops and seafood.

"Sooner or later, Australia is going to need those rare earths for its own (hi-tech) manufacturing, or else your kids will be buying your own rare earths back from China, with a significant mark-up," Mr Dines said.

If he did have a positive message, it was to invest in gold and silver, which, he says, are the ultimate monetary metals, with gold having risen in value every one of the last 11 years.


19 September 2011

At what price will you sell silver

$100.00 seems a reasonable place to take some profits, away.

Don't Miss Out as Silver Prices Surge to
$150 an Ounce
September 16, 2011

By Martin Hutchinson, Global Investing Strategist, Money Morning
Silver prices had an exciting run-up in the year ending in April - they almost tripled, briefly touching $50 an ounce before settling back down to the low $30s.

Now, silver prices are back above $40 an ounce. That may have you feeling the urge to sell - but don't.

Resist the temptation to sell silver because this recovery is for real, and it has much further to go.

In fact, I anticipate silver prices will peak at $150 an ounce within the next 12-18 months.

The reason is simple: With central banks around the world pushing lax monetary policies, prices for all commodities - gold and silver in particular - will invariably rise.

We've already seen this happen with gold hitting a record high $1,923.70 an ounce on Sept. 7. And when gold goes higher, silver quickly follows.

That's reflected in something called the "gold/silver ratio," which shows how many ounces of silver it takes to buy one ounce of gold. Traditionally, this ratio acts as a price barometer for the two precious metals. And if you look at it right now, it's easy to see that $150 silver isn't far in the offing.

The Gold/Silver Ratio
Gold and silver prices traditionally move together because both are considered stores of value in inflationary times. And while we think of gold as the premier store of value, remembering the 19th century gold standard, other societies - notably the Spanish empire in the Americas, Imperial China and Mogul India - used the silver standard and are hence more focused on silver when inflation threatens.

In the 19th century and before, silver and gold prices maintained a fairly steady relationship to each other in a ratio of 16 to 1. Silver depreciated against gold in the 20th century. However, it also acquired industrial uses, which is something gold never did (the two metals are chemically very similar, but silver is much cheaper and hence more suitable for industrial uses).

The gold/silver ratio briefly approached 16 to 1 in the 1980 precious metals bubble (silver peaked at $50 per ounce, gold at $875) but then fell back beyond 50 to 1, with gold trading around $250 an ounce in the late 1990s, while silver was below $5 an ounce.

Gold was the first to take off after 2000. And by 2010, gold traded well above $1,000 an ounce while silver traded at $12-$14 an ounce - a ratio of close to 80 to 1. This was unsustainable, and it resulted in the price rise of 2010-11, which at its peak took silver to $50 an ounce and about a 30 to 1 ratio to the price of gold.
First, the use of silver as an industrial metal falls off sharply when the price spikes. That frees up silver supplies while investment demand for gold soars. With a more elastic supply, you would expect silver's price peak to be dampened rather than exaggerated.

The second reason is that the 1980 silver price spike was caused by the Hunt Brothers' attempt to corner the silver market. No such attempt is visible today.

So the peak ratio of silver to gold is much more likely to reach something closer to 25 to 1.

The peak in gold is yet unknown, but for supply/demand reasons it seems likely to be above $2,500 an ounce - today's equivalent of the 1980 peak, adjusted for inflation - but less than $5,000 an ounce - the 1980 peak adjusted for growth in world gross domestic product (GDP) or money supply.

That would suggest a silver price peak between $100 and $200 per ounce, with $150 an ounce the most likely outcome.

Ultimately, the market won't turn bearish until global monetary policy tightens. In fact, it will probably be some months after policy is reversed before precious metals change course. That was the case in 1980, when peak prices for gold and silver lagged by more than three months Paul Volcker's first decisive move to tighten money supply.

With the November 2012 U.S. Presidential election looming large on the horizon, we probably have at least another year of rising prices. However, we may not have as much as two years.

So, all things considered, I'd keep any silver holdings at least until prices reached $150 an ounce.