The Year of the Golden Pig
By Tony Allison, March 5, 2007
Golden pigs are hot commodities this year. February 18th marked the beginning of the Year of the Golden Pig in Asia, celebrated especially in China and South Korea. The pig has been a symbol of wealth and abundance in China since ancient times. But not every Year of the Pig is golden. According to Chinese astrologists, this is the first Golden Pig in 60 years. Babies born in this year are believed to have good fortune and will lead a comfortable and wealthy life. Some feel this is pure myth, created to increase birthrates and sell merchandise. Historically accurate or not, the marketing is in full swing. A baby boom in China and South Korea is already underway, as millions of couples want their child born in this “lucky” year.
Demand for gold is also increasing across Asia as people are buying gold for friends and relatives, wishing them good luck in this “golden year.” Banks are offering gold bars as a lottery prize to those opening up bank accounts. Myth, legend or pure marketing ploy, gold is hot in Asia, not just for gifts, but for protecting individual wealth.
In December 2006, the Shanghai Gold Exchange lowered the size limit for trading in gold bars from one kilogram to 100 grams in a move to make trading in precious metals more accessible to small investors. According to China.org, the National Bureau of Statistics recently released data showing the savings deposits of urban and rural Chinese has reached 9.43 trillion yuan, up 17.1 percent form last year. China’s consumption of gold also grew by 17% in 2006, while gold consumption dropped by 10% in the U.S. The Chinese are saving and buying gold. The Americans are consuming and going into debt. This continuing imbalance has many investors worried, most notably Warren Buffett.
Mr. Buffett came out with his annual letter to shareholders last week. As usual, it was full of common sense advice and a few stern warnings. Buffet believes “the probability that the dollar will weaken over time continues to be high.” He mentioned that the US had $760 billion in “pseudo-trade” last year, “imports for which we exchanged no goods or services, a full 6% of GDP. The world is willing to accept our bonds, real estate, stocks and businesses. And we have a vast store of these to hand over. These transfers will have consequences however. Already the prediction I made last year about one fall-out from our spending binge has come true: The �investment income’ account of our country- positive in every previous year since 1915- turned negative in 2006. Foreigners now earn more on their US investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the US will now experience �reverse compounding’ as we pay ever-increasing amounts of interest on interest.”
“Interest on interest” is not a pleasant thought as a debtor, but it’s even less pleasant to see that money owed leave our shores in ever-expanding amounts. Reverse compounding is hard to overcome once the momentum begins. When you see a trend broken that has been in place for 92 years, one must pay attention. For a country to begin living on its credit card instead of its hard-earned (but now drained) bank account, has ominous implications not only for its currency, but the future prosperity of its citizens. Even though China, Japan and others choose to recycle their trade surpluses through our bond markets, those surpluses can “leave the building” in the click of a mouse.
Source: Moody’s Economy.com/U.S.Census Bureau
Mr. Buffett has warned about the risk to the US dollar for years, but he is frequently early to the party, and will patiently wait for events to unfold. “Like a very wealthy but self-indulgent family,” adds Buffett, “we peeled off a bit of what we owned, in order to consume more than we produce.” Many great families, fortunes and even empires have ebbed into history in this manner. The challenges ahead are striking. While still a wealthy and powerful country, the relentless drive to consume beyond our production is clearly unsustainable. Buffett fears a political backlash “at some point in the future” by US voters and workers as the “tribute” to overseas creditors piles up. I fear that point in the future may come sooner than we would like to believe.
Source: Moody’s Economy.com/U.S.Census Bureau
James Turk, founder of Goldmoney.com, commenting last month on the trade deficit imbalances, is concerned for the dollar. "The outlook for the U.S. dollar is worsening, which is a conclusion that can also be reached by looking at what happened during last week's trip to China by Treasury secretary Paulson and Fed Chairman Bernanke. They came home empty handed, without any concessions from the Chinese or commitments by them to help the United States by continuing to hold dollars, which the United States is recklessly spewing throughout the world as a consequence of its ongoing trade deficits."
“Looked at from virtually any angle, the U.S. trade situation is unprecedented,” stated Turk. “The annual trade deficit is larger than the budgets of Social Security and the military, and twice as big as Medicare. Since 1953, America’s manufacturing base has declined from 30% of GDP (when the U.S. had a trade surplus, by the way) to about 15% today. Since 1985, the cumulative deficit has grown to about USD $4 trillion, or about USD $13,000 for each man, woman, and child in the U.S.”
In the February 26th issue of Barron’s, Alan Ableson’s wit was on display. “China, via its massive purchases of US Treasuries and the like, enables us to merrily live far, far beyond our means. Otherwise we’d have to fall back on our savings to fill the gap. Which might create a bit of a problem because savings is what we don’t have any of. In case you wondered, we’re talking real money here. Some 60%-70% of China's trillion dollar foreign reserve hoard, or as much as $700 billion, consists of our proud nation’s IOU’s.”
Mr. Abelson also noted that his e-mail from irritated readers was steadily rising along with the major stock market indices. He mentioned a particularly scornful e-mail that hotly noted the only investments Abelson seemed to find worthy of favorable mention were oil and gold. The reader wanted to know why Ablelson wasn’t more enthusiastic for the stock market’s stellar performance the last 5 years. He ended his column thusly; “We were somewhat amused to find that over the past 5 years, the S&P has advanced 29%, the Dow 22%. During that same span, gold is up 129% and oil, 166%. We trust pointing this out won’t cause too great an elevation in our reader’s blood pressure.”
Wall Street “insiders” continually dismiss any eminent dangers to the US dollar. They do occasionally agree that the dollar is in trouble “in the long run,” but there is nothing to worry about today. Translation: “keep buying our paper…please.” In the words of the late British economist John Maynard Keynes, “the long run is a misleading guide to current affairs. In the long run we are all dead.” I advise my clients to diversify a portion of their investments out of US dollar-denominated assets just in case “the long run” arrives well in advance of their ultimate demise. And since gold moves inversely to the US dollar, it would seem prudent to connect the dots and diversify into gold and silver.
The year of the Golden Pig may indeed portend a comfortable and wealthy life to those lucky enough to be born this year in Asia. But it may not have anything to do with luck if America continues to export its wealth and productive capacity in a frenzy of consumption. As it has throughout history, the Golden Rule of politics and power will ultimately apply. Those who have the gold will make the rules.
US stocks closed lower Monday, with the Dow finishing down 63.69 to close at 12,050.41. The S&P 500 was down 13.05 and ended at 1374.12. The Nasdaq lost 1.15% and closed at 2340.68, down 27.32. Any bargain-hunting was more than off-set by weakness in the global markets and more concerns in the subprime mortgage market.
Sub-prime lender New Century Financial Corp (NEW) announced it is technically in default with other lenders, and is under investigation by federal regulators. As a result New Century lost 70% of its value today to close at 4.56. Some analysts believe this could spell the demise of the company. Another subprime lender, Fremont General (FMT) finished down 32% at 5.89. The company will sell its subprime lending business after a proposed cease-and-desist order from the FDIC.
Besides the stocks of companies that financed subprime mortgages, the shares of homebuilders also continued to take a hit. The Philadelphia housing sector index was down 2.9%, weighed by big drops in the likes of Beazer Homes USA Inc. (BZH), KB Home (KBH), Lennar (LEN) and Toll Brothers (TOL).
Overnight global markets again dropped amid continued concerns about the unwinding of the yen carry trade, a major source of financing for fast-money investors such as hedge funds. Carry trades refer to the practice of investors borrowing in a low-yielding currency, such as the yen, and reinvesting in higher-yielding currencies and assets.
Gold futures fell again, as uneasy investors liquidated commodities for cash. The front-month contract fell $4.90 to $639.20 an ounce, weighing on the likes of Kinross Gold Corp. (KGC), Yamana Gold (AUY) and Freeport McMoRan Copper & Gold (FCX).
© 2007 Tony Allsion