The new China, stimulus and Australia

It’s been a rough week for China with more economic data released showing the world’s economic engine continues to slow.  So you’d think their shares would be tanking too yeah?  Of course not.  Not in this new world of central bank knights to the rescue.  Indeed the news is so bad everyone assumes the money printing will be ramped up, interest rates dropped again, and stocks will fly.  So in the week they updated their growth forecast to its lowest level in 6 years (at 7% GDP) this happened…

The Chinese stock market has nearly doubled in the last 6 months.  In that period we saw the horrific March trade data that saw imports down 12.3%, exports crash to -14.6% (versus estimates of +8.2%) and their trade surplus at just RMB18b (versus estimates of RMB250b)!

Such stimulus assumptions would in the recent past see Aussie markets surge too on the assumption it would mean more building and more of our resources.  But not this time and maybe not again.  The data showed steel production dropped (1.7%) for the first time on record.  The penny has dropped (even front page of today’s AFR) that such stimulus is more likely to see financial market rises and no longer demand for our resources.

This has a few obvious implications for gold and silver investors.  Firstly it will see more downward pressure on our dollar (Westpac revised its forecast to 72c by September this year) seeing an increase in the AUD value of gold and silver.  It will also put more pressure on the RBA to lower interest rates, reducing the opportunity cost of the non yielding investment.  Harder economic conditions in Australia mean diversification of your portfolio to include a defensive hard asset becomes more important.  As the graphs below show, it will exacerbate the craziness of this world experiment of central bank stimulus where China have already printed more than anyone else and may be about to go harder… If graphs showing unprecedented monetary stimulus, yielding ever decreasing GDP results yet bubble like high share markets don’t make ‘economics 101’ sense to you then maybe investing in the world’s oldest proven safe havens will…