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Investing

The golden answer to Chinese import data...Chinese housewives?

May 13th, 2013 by

Eric Sprott asks: How can China be growing while the countries that purchase its exports are slowing? And what do Chinese housewives have to do with it...

 
 

Manufacturing data in the last several months has suggested that economic growth around the world is slowing. However, China’s export growth surprised the market this week and unexpectedly accelerated in April, even as shipments to the U.S. and Europe fell. This has created a conundrum for analysts and market watchers. How can China be growing while the countries that purchase its exports are slowing? The numbers don’t add up.

The numbers may be faulty

Digging deeper into these figures, several analysts have come to the conclusion that the numbers are faulty. Bank of America Corp. and Mizuho Securities Co. analysts have gone so far as to say the figures have been inflated by fake reports. An “astounding” 92.9 percent jump in exports to Hong Kong, the most in 18 years, raises questions on data quality, researcher IHS Inc. said. They even call some of the data ‘absurd’, suggesting that exporters are ‘faking orders’ to obtain export-tax rebates. These observations challenge the credibility of Chinese economic data once again.

It is has been suggested that China’s robust appetite for commodities - from iron ore to crude oil - shows that Chinese domestic demand is healthy, alleviating concerns about a renewed slowdown. China’s recent surge in gold imports puts this ‘increase in domestic demand’ observation into question. Our analysis shows that trade statistics are biased by the large gold inflows the country has experienced over the past few years. Because gold imports are accounted for in the “import” numbers of the current account (instead of the capital account like other investments), they artificially inflate the total import numbers published in the Financial Press. We say “inflate” because gold, unlike other materials, is mostly used for investment purposes and as such should not qualify as an import of “goods and services”, which is used to measure real economic activity. Now that China is importing significant quantities of gold, trade flow numbers are becoming more distorted.

Stripping out the gold effect

When we strip out the ‘gold effect’, we find that 37% of the increase in imports over the last 12 months into China is due to the massive amount of gold that’s being imported. In Table A, gross imports increased by $82 billion, but $30 billion of this increase was from gold alone.  Put another way, more than one third of China’s import growth has been solely from its citizens’ desire to own gold and not from a growing domestic economy.

Table A

 

For the 12 months ending Gross Imports Gold Imports (tonnes) Value of Gold Imports Imports excl. Gold
  (USD Bn) (tonnes) (USD Bn) (USD Bn)
March 2012 1,772 546 32 1,740
March 2013 1,854 1,071 62 1,792
Change 82 525 30 52

 

Source: Bloomberg, General Administration of Customs (via Bloomberg), Census and Statistics Department – Hong Kong, Sprott Asset Management

The power of Chinese housewives

Many analysts have attributed China’s increasing imports as signs of a healthy manufacturing sector, or increasing investments in infrastructure and property. Our simple analysis shows that more than one third of the increase in imports is due to China’s increasing gold consumption. We expect this will only increase in the near future when the explosion of gold buying in April is accounted for. New reports have suggested that Chinese housewives (affectionately known as ‘aunties’ according to the Beijing Daily newspaper) have purchased as much as 300 tons of gold in the past three weeks alone, worth almost $16 billion USD. This new gold buying could have a significant impact on Chinese import statistics and force analysts to reconsider the strength of the Chinese domestic economy.

Investing

Rely on valuations, not momentum

May 9th, 2013 by

"Price is what you pay. Value is what you get." (Warren Buffett)

 
 

 

Investment Executive, Jason Stevens, joined Sprott Global Resource Investments Ltd. in 2002. A devout student of Benjamin Graham’s value investing thesis, Jason shared with me how he is managing his portfolio right now.

The junior mining sector is highly volatile, in part because trading volumes are minute relative to other sectors. Companies that get attention in the market - because of a new discovery, or rumors of a takeover - may experience share price increases to well in excess of what we would consider fair value for their projects. Conversely, the slightest setback, or failure to meet expectations can result in companies trading at a fraction of an objective estimate of the business’ value.

The key to investing in natural resource equities is to understand the factors that affect a project’s possible outcomes and create a realistic assessment of its value to an investor. The further the price distances itself from the valuation we establish, the more potentially lucrative we perceive the buy or sell opportunity to be.

It is essential that we utilize our analytical know-how to value resource projects and to remain disciplined while investing alongside irrational market participants.

Benjamin Graham

As value-investing guru Benjamin Graham taught, markets are voting machines in the short term, but weighing machines in the long term.  Bouts of volatility in stock prices should be seen as opportunities to enter or exit a trade, not as a means of research.  The long-term nature of markets is to deliver each company’s price back to an accurate representation of their projects and financials assets. As speculators, the deeper the price discount, then the greater the upside potential of a stock. This is what the billionaire investor, Warren Buffett, refers to as his “margin of safety”.

Market irrationality

I often see two kinds of obvious market irrationality: (1) Those who depend on momentum to enter an investment and (2) those who attempt to call “the bottom” on every investment.  I refer to these types of investors as “market relativists”.  They are looking for current and/or historic prices to make investment decisions with complete disregard to any objective value.

Trying to pick the bottom on gold and mining stocks is usually a losing proposition.  With all his debt-laden flaws, economist John Meynard Keynes made the astute observation that “the market can remain irrational a lot longer than you can remain solvent”. Going “all in” at any level with the assumption that the market cannot drop any lower may prove disastrous. An asset that is selling at a discount today may very well sell at an even greater discount tomorrow.

Equally irrational is seeking to profit from price momentum.   This is a form of the ‘greater fool’ theory - potentially overpaying for an investment with hope that some other fool will buy it at a higher price from you. As Rick Rule has remarked, when we do this, we disarm ourselves of our most important natural edge over the market - our experience and expertise.

 

By Henry Bonner (hbonner@sprottglobal.com)

Sprott Global Resource Investments Ltd.