There’s no question that China and the rest of Asia are outgrowing the Western world by leaps and bounds. All you have to do is follow the stats coming out of Asia, or take a trip to anywhere in Asia, and you’ll get a firsthand feeling for how vibrant the region is.
But there’s also no question in my mind that there is some slowing going on. Perhaps a bit more slowing than I originally expected.
First, according to a just-released HSBC research report, China’s manufacturing activity fell sharply in March as factory bookings of new orders fell to a four-month low. In addition, overall employment dropped to its lowest level since March 2009.
Second, the CEO of BHP Billiton (BHP) — the largest iron ore supplier in the world — recently stated in a press conference that he saw signs of “flattening” iron ore demand from China. Iron ore, used in steel production, is a very sensitive indicator of overall Chinese and Asian demand.
Third, even auto and truck sales are slowing in China. Total vehicle sales for January and February shrank 6% compared to the same period last year.
A slowdown? Yes. A disaster? No. But all of it fits in perfectly with my overall forecast, which I’ll review now.
Short term, you know I’ve been bearish the commodity sector. I remain so …
For one thing, gold completed an 11-year up-cycle at last year’s record high. This means that a pause and correction for 2012 is the highest-probability course for gold this year. And so far, that’s exactly what the precious yellow metal has been doing — pausing and correcting.
Indeed, gold’s failure to execute a monthly buy signal at the end of February, as I recently told you, is a major signal that gold could head much lower in the short run.
From what I’m seeing in silver, the same holds true. If silver can’t soon get back above the $34.25 level on a closing basis, it’s in danger of a devastating plunge down to the $26 level and probably A LOT lower.
For another, I’m seeing similar corrective signs in nearly all commodity markets. Cocoa is looking very weak. So is coffee. And the grain markets, while biding time largely going sideways, are also in danger of a sharp decline.
At the same time, the price of oil is having a very tough time moving above a key resistance level at the $111 mark. As long as the price of oil remains below $111, it too is in danger of a slide back down.
Fundamentally speaking, demand from the world’s largest single economic zone, Europe, is set to decline due to the region’s high unemployment rate and the austerity measures taking effect as a result of Europe’s sovereign-debt crisis and euro troubles.
Meanwhile, whatever strength we’ve seen in the U.S. economy is nowhere near enough to compensate.
So in the short run, looking ahead over approximately the next six months, I see no reason to be outright bullish the commodity complex. In fact, I still expect to see …
Gold slide to $1,490, then even lower.
Silver to at least test the $26.40 level.
Oil slide to the $80 region.
Base metals such as copper take a sharp fall.
The prices of agricultural commodities also get hit.
But in the long run, the seeds are now
being sown for the next big leg up in
commodities and tangible assets.
It will come from much-lower prices overall in the commodity complex. And importantly, it will start when least expected.
The reasons for the longer-term bull market remain very much intact. Although we’re at a lull now in the sovereign-debt crisis, it will come back with a vengeance and we will see …
Europe’s economy crater, with Greece eventually defaulting; Portugal, Italy and Spain cratering; and even France getting hit with major debt issues.
This will lead to even more European Central Bank money-printing operations, a weaker euro, and a renewed flight of capital into tangible asset markets.
We will also see the U.S. get hit hard by the sovereign-debt crisis. Keep in mind that Washington is even more indebted than Europe. It’s only a matter of time before it falls, too.
Right now, we’re seeing some continuing capital flight from Europe into U.S. equity markets. We will continue to see that, and the long-term prospects for the stock markets remain very bright indeed. But even here, as in commodities, I still expect one more broad market swoon before equities become a safe haven from the public sector’s sovereign debt crisis.
And as far as Asia goes, don’t bet on the downside there, even though the region is perhaps a bit weaker than I had expected.
You’re far better off using any dips in Asia to position yourself for the next leg up in Asian economies and markets, which will be HUGE.
Core long-term positions in vehicles such as the iShares FTSE China 25 Index Fund (FXI) make a lot of sense. I suggest buying on weakness and look to potentially double and triple your money over the next three years.
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