Silver, Copper, Gold... And China

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 |  Includes: GDXJ, GLD, JJC, NG, SLV
by: Dr. Stephen Leeb

Lately we've been focusing on the best of what we consider to be low-risk/high-return stocks. These have ranged from Intel (NASDAQ:INTC) to Eli Lilly (NYSE:LLY). And here, too, we see no need to change our view. These kinds of investments should continue to be very good ones.

But now we're ready to get a little more aggressive. We like silver, we like copper, and we like gold. And the major reason we like these commodities (as well as virtually all other commodities) is China.

China continues to do a remarkable job on almost all fronts. Yes, many financial experts and commentators continue to buy into the idea that China is reaching the end of a long period of outsized growth. But this is a very bad mistake. As we've been saying for some years, China "gets it" - especially when it comes to resource scarcity and energy scarcity. If everyone else "got it" the way China does, then China's job would be much more difficult. And by "job" we mean establishing a country that is built to thrive throughout this 21st century.

While it's true that growth in China has slowed down, it's also true that it will ramp up in the second half of the year, and probably continue at a fair pace (and not just by Western standards, but by Chinese standards) throughout this decade.

The beneficiaries will be the aforementioned copper and silver, gold, and virtually all commodities essential for building out an infrastructure necessary to accommodate new energies. Yes, this also includes oil - big time. In general, we prefer to build a commodity portfolio around the ETFs that are directly linked to the commodity. For copper that means iPath Dow Jones UBS Copper Total Return Sub-Index ETN (NYSEARCA:JJC); for silver, it's iShares Silver Trust (NYSEARCA:SLV); and for gold, it's SPDR Gold Trust (NYSEARCA:GLD).

Still, the biggest winners in the next move up in commodities will be miners, but not the big ones. Ironically, the large miners will suffer for the very reason that there will be such an explosive bull market - namely, the rapidly escalating costs of mining ever scarcer resources. That's why we prefer junior miners such as NovaGold (NYSEMKT:NG), even though they can be horrifically volatile. More generally, we reiterate very strongly our recommendation of Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ).

(One small caveat here, and it applies to gold itself rather than anything else, is that some of our indicators suggest that the period of consolidation we've been experiencing may have a bit more to run. But this is a quibble in the face of what we believe will be an inevitable bonanza to end all bonanzas.)

Let's talk about China a little bit more.

Recently Bloomberg News ran a story whose title contained the phrase "China Slowdown Worst in Wenzhou," referring to a city with a population of about 9 million in eastern China. (The story is available on all Bloomberg terminals and online at Bloomberg.com).

This piece is littered with anecdotes pointing to how poorly Wenzhou is doing. One quote from a shoe merchant conveys the common theme: "'This is the worst year,' he said as he waited for customers to buy sneakers from his half-empty shelves. This place used to be packed with buyers from around the country, now it's full of unsold shoes." The shoe merchant now plans to shut down his store, which had been very profitable for two decades. Other anecdotes in the story are equally gloomy, suggesting a city in a terrible economic depression.

And yet, after a series of dismal subheads throughout the article (Inventory Buildup …Weaker Exports… Quiet Streets…Giving Up...) we find out that Wenzhou's growth moderated to a 5 percent pace last quarter.

What would we give to have growth of even 3 percent, never mind 5 percent, throughout our country?

This only verifies what a skillful job China has done in persuading brokerage firms like Morgan Stanley, Credit Suisse and UBS that its growth rate has no place to go but south. Though we haven't heard much from the redoubtable Jim Chanos lately, or many other short-sellers of China that have frequently been in the news previously, we would guess they have not changed their views. They should, and quickly.

I recall speaking at a conference on China I attended last year, where I was one of only two China bulls. Still, I was in good company, as the other bull was David Rubenstein, one of the sharpest private equity players in the world and the man who built Carlyle into a gigantic firm. He made a comment about China that continues to resonate with me: in 16 out of the last 18 centuries, China's economy has been the best in the world.

The two outliers were the last two centuries. Any reading of modern Chinese fiction, such as the work of Lu Xun, grabs you by the gut in its portrayals of a China dominated by foreigners. There's no way the Chinese want to repeat "the sins of the last two centuries." And the way they're going, they won't.

Mark Z. Jacobson, a Stanford professor we have often quoted, and whom we know well enough to say his research is thorough and excellent, has estimated the costs of building out renewable energies worldwide to be in the neighborhood of $100 trillion. For China, whose population is approximately one-fifth of the entire world's, that would suggest expenditures in the neighborhood of $20 trillion. We actually think Jacobson is somewhat conservative here, and as we said before and in our book "Red Alert" he and so many others, ignore the problem of resource scarcity.

There is probably nothing more critical or important to a country or the world itself to develop in a way that does not run into a roadblock created by scarce resources. Thus, as some people bemoan (or cheer) the slow growth in China, they seem not able to see the areas of extraordinary and critical long-term progress. For example: the northwestern part of China is not known for its bustling industry, especially in the desert area known as Gansu.

And yet, Gansu, the home of about one million Chinese, has seen annual investments totally about $6 billion in wind, solar and other areas related to renewable energy. The result has been noteworthy. An area once known as a center for oil has largely replaced the now depleted wells with solar farms, wind farms and a smart grid. By 2020 the area should be more or less free of oil and largely running on renewable energies.

If you multiply the million people in Gansu by 1,500 (i.e., to arrive at the approximate total population of China of nearly 1.5 billion), you'll see the scale at which China is hoping to build out its renewable energies: Gigawatts of wind and solar are likely to be eventually measured in four digits. If you do the math and make a few assumptions, you can see how China could easily spend $20 trillion on these efforts.

And to assume a country on its way to spending this kind of money is headed for some sort of Armageddon is just silly. Remember too that renewable energies are labor- as well as resource-intensive.

The real question comes down to longer-term shortages of copper, silver and other metals and minerals destined to become scarce. A thousand gigawatts of solar would surpass the current yearly supply of silver by several-fold. And a thousand gigawatts would be a very modest long-term goal for China. How about the rest of the world?

For example, Asia has another very large economy called Japan. Recently that country announced plans for ramping up solar energy to 3.2 gigawatts, simply a fraction of one percent of the amount of electricity they will eventually needed in Japan. But even these 3.2 gigawatts move the needle in silver, as it represents nearly 1.5 million ounces of the metal.

Is it really hard to see why we like silver, which is a crucial component in solar energy technology, or why we like copper, whose role in smart grids and hybrid cars will eventually come close to exhausting all available supplies of copper?

Gold, of course, is a different animal, but, as we've said so many times, how in the world can you ration scarce resources with paper money? Another sign that China "gets it" is their massive imports of gold at the same time as they are achieving the world's highest rate of gold production internally.

China's intention of making the Yuan the world's major reserve currency is also evident, as recent financial reforms included liberalizing the amounts banks can pay their customers for deposits.

That China can do more than one thing at a time - i.e. liberalize their banking system while building out new energies - can also be seen from the record amounts of long term loans that took place there in the second half of May, the majority of which went to - you guessed it - renewable energy projects.

Yes, we are still betting on stocks and indeed think the U.S. market will rally, but if you want to play the game the Chinese play so well, think long term, and "long term" in this case means "think commodities".

Clearly, this article is very much informed by my frustration with our political process. While it still may not be too late to come together and develop a world we want our children to live in, our politics are marred by mudslinging and arguments over matters that have little to do with the year after next, let alone the rest of the century. We need to get our act together pronto - and stop fighting about it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Leeb Group, its officers, directors, shareholders, employees and affiliated entities and/or clients of such affiliated entities may currently maintain direct or indirect ownership positions in financial instruments (i.e., stocks, bonds, options, warrants, etc.) of companies or entities whose underlying exposure is in the companies mentioned in this article.