 China... and Gold
Richard Russell
Dow Theory Letters
October 11, 2004
Extracted
from the Oct 9th, 2004 edition of Richard's Remarks
Periodically,
I like to talk about the big picture. As I see it, the big picture,
the fundamental picture, is that the world is producing too many
goods. The entrance of China and India into the global economy
has changed everything. China and India entering the world economy
has meant that one-third of the world's population has suddenly
become part of the global economy. And these people will work
for fraction of what US and European workers will toil for. Furthermore,
China has 15 million new people coming into the work force every
year, and I believe India has the same. These people want to
work, and they'll take any job and do it for less than we will
here in the US. That's a huge problem, and it's one reason why
jobs are being lost here. It's not the President's or anyone
else's "fault," it's global capitalism in action. Period!
The phenomenon
described above is basically deflationary. It means the
price of merchandise and goods are being produced for less. And
they are being sold for less. If you don't believe it, take a
walk through your local Wal-Mart some day.
Ah, but there's
an irony. China and to some extent India are becoming more prosperous.
Their 2.5 trillion population want more of what we in the US
and Europe have. In China alone, the need for basic commodities
is huge -- basic commodities for China's manufacturing and for
China's own use. And the result is almost a panic for basic materials
-- and fuel.
Oil is now
priced at record highs. Goldman Sachs recently raised its oil
price forecast to an average of $50 for the rest of this year
and $47 for 2005. The three-month copper price hit a high of
$3.115 a tonne on the London Metals Exchange, highest since Jan.
1989. Aluminum hit a nine-year high this week, lead reached an
11-year peak and zink touched its highest mark in five years.
What's driving
up the metals? In one word -- China. China is not only exporting
huge quantities of goods, it is building its own infrastructure.
New highways and new cities are going up all over China. China
is in a frantic rush to become the next world power. China is
trying to do in a few years what it has taken other nations decades
to do.
Can China do
it? They're doing it. During WW II thousands of Chinese men and
women and children cracked rocks by hand to build Allied
air fields. They built runways long enough to land the giant
B-29s. They cracked rocks with hammers until their hands were
bloody. Guys who flew in the Pacific will attest to that. No,
I wouldn't underestimate what's happening in China today.
Where does
that leave us and why? The US is now living on credit. The US
is paying for its massive imports with credits and paper. And
that is unsustainable. The big picture today is how long the
dollar can hold up under these conditions. The game will go on
as long as the rest of the world continue to accept dollars.
Today there
are two viable alternatives to dollars. One is another form of
central bank paper -- the euro. The other is the only time-honored
form of wealth -- gold. Both the euro and gold are now moving
higher.
The central
banks believe they can control the world's monetary system. They
print the money, and most of the world accepts it. But there's
a small segment of the world that has learned the lessons of
history. This is the segment that is now accumulating gold.
more follows for subscribers
. . .
Richard
Russell
Dow Theory
Letters
© Copyright 2004 Dow Theory Letters, Inc.
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