1.3 billion new Chinese cars – and soaring gold

By WND Staff

Editor’s note: The following is a guest commentary from one of WND’s sponsors, Kevin DeMeritt, president of Lear Financial. If you would like to learn more about investing in precious metals, take advantage of the free information Lear Financial is making available to WND readers.

Imagine 1.29 billion people walking or riding their bikes to work. Now imagine them driving.

That’s where China is heading. The country’s explosive growth – nearly 10 percent in the last quarter of 2003 alone – is elevating the expectations of its formerly unassuming people.

And all of those expectations involve energy.

Take automobiles, for examples. Last year’s 55 percent increase in passenger cars sold in China’s largest cities is just a sign of things to come. A matching increase is expected this year, as well.

Carmakers, as you might imagine, are taking notice. China was responsible for almost all of Volkswagen’s global sales growth in 2003, while GM sold about 70 percent more cars in China in the first quarter of 2004 than a year ago. These are statistics that have other carmakers drooling.

“If you look around the world in terms of profitability, growth in China is head and shoulders above everybody else,” said Michael Dunne, president of Automotive Resources Asia.

But while it might absolutely thrill Detroit, this pent-up Chinese demand for automobiles is only making global energy planners jumpy.

Only so much oil

With burgeoning auto sales, it only follows that Chinese oil consumption is on the launching pad, too. And that’s just one of the many petroleum demands of the explosive Chinese economy.

The statistics bear this out. China, once a significant exporter of oil in its own right, is now the fastest growing net importer of crude oil as well as the world’s second largest oil consumer (behind the U.S.). Amazingly enough, this thirst for oil is expected to go from 5.5 million barrels per day to 8 million barrels per day within six years!

Coincidentally, 8 million barrels per day is virtually all of Saudi Arabia’s daily production.

Something’s gotta give here.

“The great nations of Asia, primarily the giants China and India, are growing rapidly and need to vastly increase their energy consumption to build out their infrastructure and bring their lifestyles closer to Western standards. And since much of the world has already been explored for crude, there just is not enough new oil coming online to feed both the industrialized West and the industrializing East,” wrote analyst Adam Hamilton.

It’s kind of like the lyrics of that old song, “How you gonna keep them down on the farm, now that they’ve seen Pairee (Paris).” Applied here … how can China go backward from the point of sophistication it has now achieved? It can’t. China won’t be consuming any less oil than it is today. It will only be consuming more. So, given the world’s limited supply of oil (and, some think, diminishing oil supply), the stage is being set for a serious energy showdown.

The higher the oil, the higher the gold

Barring the fabled discovery of a free energy source, oil has no place to go but up. And that’s just focusing on the energy appetites of the Asian nations. It’s not factoring in the shaky state of the Saudi oil producers and the Middle East in general.

“A major crisis could well be a lot closer than many people believe possible. Saudi Arabia is in a perilous state in terms of political stability, and the price of oil, which has been steadily rising for a long time, is in position to spike. And I don’t mean by $10. It could go to, say, $80, maybe $100, in the event of a massive terrorist attack in Arabia. Historically, gold and oil have tended to move in tandem, and a crisis of the proportions I am talking about could well result in a spike in gold too, to, say, $500 – $600, perhaps more,” wrote German analyst Clive Maund.

He’s dead on. Oil and gold have historically moved in tandem. In fact, analysts have long recognized the gold-to-oil ratio. Since 1965, that ratio has been 15.4. Today, however, it is way out of line at 11.1. And that’s the best it’s been in a while.

At $36 a barrel, gold should historically be $554.40, according to the ratio … instead of the $401 it is at this writing.

“Any way you want to slice it, in light of gold’s historical relationship to oil, gold is way undervalued. Gold is significantly lagging the oil bull and will almost certainly catch up sooner or later here to bring this key gold-to-oil ratio back in line,” wrote Hamilton.

That means the dynamics are in place for a paradigm shift in how we perceive our formerly abundant oil supply and our formerly low-cost gold inventories. With time, these factors will most assuredly play out. The only real question is whether or not we will be ready.

Consider the observation of the Tactical Investor newsletter’s Sol Palha:

“What you will notice … is that oil has been rising in every currency and therefore it is in a true bull market. … Once more we think this is a precursor to what is in store for the precious-metals sector in the future … those who are not on board will miss the ride of a lifetime.”

None of this takes into account, of course, the many other factors bullish to gold. For example:

  • Rising interest rates were bullish for gold in the ’70s because inflation was off and running and the Fed’s record rate-setting proved unable to have a moderating effect. So gold responded by jumping a record 2,261 percent. With the Fed’s quarter-point rise in interest rates, the very same scenario could be kicking off today.

  • In May, consumer prices rose 0.6 percent. That amounts to a 7.2 percent annualized rate of inflation. According to an article on the MSNBC website, groceries are quietly up a full 10 percent from a year ago! What’s more, should the Chinese re-value their currency as many suspect they’ll do in October, it will only add to these serious inflationary pressures. To repeat, it was an out-of-control, Fed-proof inflation in the ’70s that kicked off gold’s record run.

  • Former Treasury Secretary Robert Rubin, along with the former president of the New York Fed, Gerald Corrigan, have both warned that the U.S. could be heading straight into a severe crisis, “worse than what we saw in 1987,” due to the current account, budget and trade deficits. These deficits could do more than offset the normally dollar-strengthening effect of higher interest rates. Needless to say, in such a crisis, investors would flock to the only debt-proof assets left, the precious metals.

Small wonder analysts like John Reade of UBS Bank have consistently pegged gold at $455 an ounce or higher by year-end – which is not to say that we should adopt a panicky “sky is falling” mentality and let fear drive us to gold. Instead, objective observation, cold logic and historical precedent should be enough to propel most any thinking investor into a golden diversification.

And, if that’s not enough, just think of those 1,296,077,196 upwardly-mobile Chinese.

Special for WND readers, Lear Financial is making available free information on investing in precious metals.

With more than 20 years of industry experience, Kevin DeMeritt is president of Lear Financial, one of today’s fastest growing and most successful precious metals investment firms.