Put It All in China and Gold

August 13, 2007

It's hard not to notice the continual buzz around China and the finite amount of gold in the world.

I know those may sound like some crazy words coming from an indexer.  But those of you who know me well know I've always been a bit of a closet gold bug.  Before it was Newmont Mining or a fund of gold mining companies.  Now I can buy the actual bullion - or an ETF of gold companies.  And that delights me.

And it's hard to ignore all of the market mavens singing the praises of China.  Burton Malkiel is about to come out with a China book, for goodness sake.  And Jim Rogers has his daughter studying Chinese.

Here's been the thing about China for me for a long time.  Great story.  More challenging reality.  Kind of like oil.  Oil was running out in the 1970's. Then crude went to less than $10 a barrel.  But like index changes, the flow is going only one way, toward diminishing supply and ever-growing demand.  So that holds long term for Crude, except for that awkward contango issue w/ futures markets.

But I digress.

So what is all this about China and gold? Well, first, despite the fact that China seems overbought at the moment (an 80%+ returns year can give you that feeling), it's hard to think that China is not for real.  I used to be very suspicious of the government statistics, but everyone who has visited China recently tells me it's going absolutely insane there - for real - the most building construction in the History of Man.  That kind of thing.  So yeah, I'm long China.  It's just that up until now that was only through heavier EM exposure.  Now I'm considering the more direct route in some limited way.

The fact that the Chinese market looks a lot like a casino sometimes, uh, concerns me.  But so did our market when we were partying like it was 1999.  Well, it WAS 1999.  The spread between the A Shares and H Shares is NUTS.  Check Heather's excellent IU.com article on that. (Welcome to IU.com Heather!) There's a lot out there if you're interested. I'm looking forward to Burton's book too.

And now gold. How does gold relate to China?  Well, in a couple of ways.  First of all, to some degree Chinese like gold.  And the Indians love it. Add that to the fact that I forget - it's something like all the world's gold supply could fit on a basketball court piled up to an arena ceiling or 8 feet deep on a football field or something along those lines. The gist is - there's not much of it.  And when things get wacky on the downside, gold has always been a standby in the past.

So gold may look high, but it could go way WAY higher is my point.  And while it hasn't looked that way recently, it's historically (and this is intuitive, right?) been a great hedge against falling markets.

So I'm not moving my whole 401(k) into GLD or IAU or GDX (oh yeah, I could even do that if I wanted to) but I am certainly looking at it.  And it's looking better than a lot of what's out there.

And if I had big stocks of cash I might be rebalancing into my fixed income allocation about now.   That's what it's looking like from here.  All indexing all day long, right?



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