China’s much-anticipated official Q1 figures were released today, and they beat expectations.
- GDP growth for the first quarter of 2019 clocked in at 6.4%, beating analyst expectations of 6.3%.
- Industrial output increased 8.5% over March of last year.
- Retail sales increased 8.7% over last March.
I take all such numbers with a large pinch of salt, of course. But whatever the real numbers may be, these upticks are consistent with other data, so I’m willing to credit them with some relationship with reality.
On the other hand, last week’s stats were not so great:
- US dollar-denominated exports were up 14.2%, almost double the 7.3% expected.
- But USD imports were down 7.6%, more than five times the expected 1.3% decline.
- Worse, March 2019 car sales were down 12% compared to March 2018—and that after a massive decline of 18.5% in February.
From this, I conclude that China’s efforts to stimulate economic growth are working, but they’re not out of the woods yet. That’s no great surprise, given slowing growth among China’s major trade partners.
It could have been worse—much worse.
If China’s central bank had failed to get any bang for its stimulus buck, the implications for commodities prices would have been dire. By that, I mean that if this week’s numbers had disappointed, I’d be seriously looking at making changes to my portfolio right now.
As is, I’m staying the course. Why? Because if China is stimulating its economy successfully and we get an end to the trade war soon as well, we could see a major surge in industrial minerals prices this summer. One might think that the much-signaled trade deal is already priced in by markets, but I don’t think so. Even vague news on the trade war still moves the needle every time.
I’d expect this possible combination of good news to have a particularly strong impact on the main new energy minerals facing supply deficits, like copper and nickel. Cobalt could see another day in the sun as well. And let’s not forget silver, which is also an energy mineral and way oversold compared to gold. Silver could easily catch up due to industrial demand, even if gold continues trading sideways this year.
But there’s a dark cloud behind this silver lining. If China’s growth signals a rebound in the global economy—and I’m talking the real economy around the world, not stocks on Wall Street—I would expect to see less demand for safe-haven assets like gold in the near term.
In time, I’d expect increasing “wealth buying” in China (and India) to more than make up for the loss of safe-haven buying in the West. We’ve seen this many times before, which is why so much of the world’s physical gold has moved from West to East over the last dozen years.
For the very near term, however, a global surge of investor optimism would be a strong headwind for gold prices.
Add this to gold breaking significantly below $1,300, and I would not be surprised to see gold test the $1,200 price level before heading back up again.
Gold enthusiasts may not want to hear this. But I wouldn’t be doing them any good by cheering them on, no matter what happens. It’s my job to provide the most useful analysis I can—whether or not the news is happy.
That said, I’m not predicting that gold will head down to $1,200 this summer. I’m just saying that it has rolled over, and given what’s happening in the global economy, it’s possible.
Of course, the opposite is just as possible. A shooting match in Venezuela—with US and Russian troops at risk of being drawn in—could light a fire under the price of gold in a big way. Bit it’s not just black swans that could send gold suddenly higher. The Wall Street rally turning into another rout like we saw at the end of 2018 could so the same. And remember that China is visibly not out of the woods yet. Plus, the trade deal is not a done deal.
I’m not predicting what will happen this year. I’m laying out the main possibilities I see based on the latest data. That boils down to higher odds—not certainty—of better industrial minerals prices and lower gold prices this summer.
What to do?
Personally, I’m not planning to add any industrial metals stocks to my portfolio right now, as we don’t have a clear green light. I’d rather miss some early gains than make the wrong call.
I’m also not buying and gold stocks right now, because I might be able to get them significantly cheaper this summer—especially if “sell in May and go away” thinking exacerbates the situation. On the other hand, I’m not selling any gold plays either, as I’m not sure of that near-term weakness.
And of course, none of this affects my views of physical gold, which is where I put my savings. I intend to accumulate there whenever I have extra cash to sock away, for as long as I can see into the future.
Your mileage may vary, but that’s my take on the latest data from the world’s biggest source of demand for resource commodities: China.