Sunday, April 17, 2011

Coming Into Focus

In the last post I wrote, "As I have repeated ad nausem, the interest in precious metals is simply an extension of the interest in the housing bubble in Real Estate that has been our primary focus these past two years."

And, as if on cue, weekend reading reinforces the theme.

Following news that Chinese inflation in March hit 5.4%, the PBoC has once again decided to intervene, enacting its fourth Reserve Requirement Ratio hike of 2011. The move, taking the requirement to 20.5% for the nation’s biggest lenders, came less than two weeks after the central bank boosted benchmark interest rates.

“Tightening will continue until there are signs that inflation has been effectively brought under control,” Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd.

The increase in reserve requirements was the fourth this year and has been triggering  a  plunge in Chinese real estate, as noted by a number of blogs earlier last week including our friends over at VREAA and at Zero Hedge.

“Prices of new homes in China’s capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city’s Housing and Urban-Rural Development Commission... Home purchases fell 50.9% year over year and  41.5% month over month the newspaper said…  For all intents and purposes a drop of this magnitude levered even 2 times (assuming 50% or so equity down) means that China is on the verge of a complete bubble implosion.”

And as China's capital suffers it's biggest drop in real estate prices in 5 years and the nation suffers a 7% countrywide plunge, JP Morgan's Jing Ulrich has come out and said what we all know is already happening. 

Ulrich says it all means that real estate is no longer an attractive asset bubble and that the "mass affluent" Chinese will be forced to invest in gold and alternative property investments.

From Dow Jones: This group "has seen its investment options sharply affected by restrictive housing measures" such as property taxes, increases in down-payment requirements, and raised interest rates, "since these households possess sufficient capital to purchase investment property, but do not have the same degree of access to investment vehicles such as private equity funds and retail property as the super-rich,  equities, gold and alternative property investments become the key beneficiaries."

It is important you appreciate what is going on. 

The worldwide rush into Gold and Silver is only just starting. Back on  April 7th I posted this chart from Sprott Asset Management which shows how small the current investment in gold and gold mining shares is compared to large the investment has been during the previous bull market era's in Gold. 

As a % of global assets, investment in Gold in 2009 was less than 1%.

What you are going to witness over the next few years is a massive rush into precious metals.

And concrete evidence of this trend surfaced this weekend as it was revealed that the University of Texas has taken delivery of  $1 Billion in physical Gold.

With an entity as large as the University of Texas moving so solidly into Gold what have concrete proof that what you are seeing is the start of hedge funds making the move - just like they did in the years leading up to 1981, 1948, 1932 and 1921.

As this moves intensifies, the supply/demand equation for Gold/Silver will be squeezed hard... and the price will soar.

Meanwhile as the China real estate bubble collapses, the prognosis for the Vancouver market is that we will not escape the same destiny of the United States, England, Ireland, Iceland, Spain, Portugal, Greece, Italy, etc.

Foreign investors are always the last to pile into a bubble.  As the Chinese super-rich rush to join the precious metals stampede, they will dump their Vancouver real estate holdings to avoid loosing capital on real estate in the same fashion that is now playing out in China.

The writing has been on the wall for several years and it's clearly visible now to anyone who wants to see it.

If you have real estate in Vancouver, sell it and cash in on the equity at the height of the bubble while you can.  If you are in debt, get out of it ASAP. And if you have money to invest, take advantage of what are now extremely low prices for precious metals... especially silver.

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  1. I've always hear insights of great economic commentaries but only so from their American point of view. It's nice to read about from a Canadian point of view, even more so from a neighbourhood's point of view. Keep up the commentaries.

  2. Physical silver is getting harder to come by. I am astonished at the level of demand we are seeing, and we are only entering the first leg of this bull run. Soon as the wider public come to realize the extent in which the global financial system is stressed, we're going to see some phenomenal moves.

    These are interesting times, to say the least.

    -Clint H.

  3. How much of the run up in gold and silver prices is supported by QE money?
    I think it is an important question. In terms of market psychology, further QE will be bullish for the precious metals. However, if a relatively significant portion of the current run up in gold and silver is funded by QE liquidity, then doing the 'disciplined' thing (stopping QE) will mean drying up some liquidity that may lead to retrenchment in precious metal prices. Any thoughts?