The risks to China, India and global Gold Prices if broader commodity prices rise further...
IT'S ONE THING when gas prices go up, says Mike Norman at Hard Assets Investor. It's another when people can't afford to feed themselves and their families.
That's why Mickey Fulp of MercenaryGeologist.com sees today's global inflation as potentially very disruptive, especially if the Middle East unrest is repeated in China. Here he tells HAI why...
Hard Assets Investor: Do you tie what we saw happening in Egypt to the increases in food prices?
Mickey Fulp: Yes. We saw that happen in Tunisia recently. A government came down that was in power for 23 years, basically, because of food price riots. Certainly that is a big factor in Egypt. If that happens in East Asia? Most rural Chinese and Indians spend something about 50% of their net income on a yearly basis to feed their families. If that goes to 60 or 70%, we could see food riots in India or China. Then those countries are going to have to cool off their economies immediately by raising interest rates. We see that happening now in China. They're very concerned, although they very slowly raise their interest rates, incrementally.
HAI: It's not having much of an effect if, you know, if China is engineering a soft landing. And a lot of times, those soft landings end up to be a crash. If we start to see these riots spread throughout the world, isn't that bullish for gold, like a flight to quality?
Mickey Fulp: I think it most certainly would be bullish for gold. But it's going to be very negative, very bearish for industrial metals and other commodities.
HAI: Because it'll cause economies to contract sharply?
Mickey Fulp: Absolutely. So if we started seeing this, industrial commodities, which is really what's driving the commodities sector...I mean, we all talk about gold. But it's a really minor part of the entire commodities sector. The biggies out there are oil, coal, iron, aluminum, copper. And the demand for those could essentially collapse because of the demands being driven by China and India, for the most part, with food riots. If they can't engineer, as you say, a soft landing and it becomes a hard landing, that's very bullish for industrial commodities, in my opinion.
HAI: Now, you don't hear this talked about very much. Basically, you're saying that the bullish argument could create its own demise if prices continue to rise. And we're really talking about food. Because, again, if people can't eat, bad things happen.
Mickey Fulp: Absolutely.
HAI: So that bullish scenario creates the seeds for its own demise, at some point, if it continues on like that.
Mickey Fulp: I would agree with that too. What's happened in the commodities markets...I think they're very speculative right now. Hedge funds have moved big-time into commodities, just as they did from about mid-2007 to mid-2008, when we saw commodity prices go crazy, records being set. And that was all pure speculation in the futures market. I see that happening right now. It's driven, in large part, because of low interest rates. Speculators can't make money in other avenues of investments, so they're going into...
HAI: But the stock market is going up. In a little bit less than two years since March '09, the stock market's almost doubled here in the United States...
Mickey Fulp: True. And I would say that that factors into it too. But really, it's the hedge funds, I think, driving the speculative futures markets and commodities. That is very fickle money. That's fast money, easy money, quick money, to move in and out. And I hope that we don't see a collapse in commodity prices as we did pre-global economic crisis in the second and third quarter of 2008.
HAI: How much of an effect do you think the new regulatory measures, now, under Dodd-Frank ? position limits, more transparency, moving things that formerly were off exchange onto exchanges...how much of a damping effect do you think that's going to have, if any?
Mickey Fulp: I don't have a really strong opinion about that right now. I think that's going to basically play out as the markets adapt. And certainly, the markets will adapt to the new rules and regulations. There have been huge dominant positions developed in some of the commodities over the last year or so. And I personally don't think that's very good for the market, especially when you get dominant shorts in the market.
But as this plays out, I think the markets will adapt. And we may have a little bit of a time of a mixture of not quite knowing which way they will go. But eventually, people will learn to live with those rules and how to prosper under those rules.
HAI: Alright; great. Thank you very much.
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