By William Patalon III
What do Baywatch and a $2,000-an-ounce Gold have in common?
Give me a second and I’ll show you….
I was working as a business journalist and covering Eastman Kodak Co. (NYSE: EK) for Gannett Newspapers in the late summer of 1996, when a month-long reporting assignment sent me to China and Japan. It was a stunning experience, and was essentially one long, uninterrupted investment epiphany for me. But even with that one particular moment stands out and has stayed with me ever since.
That moment – which even now makes me chuckle, but which was a powerful realization, all the same – came to mind last week as I was reading the latest issue of The Aden Forecast, a newsletter that focuses on investments, the capital markets – and precious metals.
Let me explain …
All That Glitters Isn’t Kodak Gold
I’d been on the Kodak beat for about five years, and had been chronicling the struggles of the once-great photographic giant. It was arguably the most important beat at the newspaper, given that Kodak employed 40,000 people in the region and 100,000 worldwide – and at the time was still a technology leader.
But rival Fuji Photo Film Co. Ltd., was giving Kodak a real run here in the U.S. market. Kodak found itself largely locked out of the lucrative Japanese market. And though Kodak leaders didn’t really see it at the time, the footsteps of digital photography were growing louder, an echoing epitaph for its once-vaunted film business.
So the company made a strategic beeline for Russia, China and other nascent markets where the consumer class was reaching a critical mass. Because the company had fallen short on some other strategic moves, we decided a firsthand look at Kodak’s China operations was critical, especially since the company itself said China was a key to its future financial health.
My photographer, Jiro Ose, and I had been assigned two “guides” from the state-run Xinhua News Service, who accompanied us pretty much everywhere we went. While in Shanghai, all four of us were booked into the stunning and historic Jin Jiang Tower Hotel, two to a room. Because the hotel was overbooked, we were on two different levels: Jiro and I were booked into a room one floor above our two new friends from Xinhau.
Though it is a gorgeous place, the hotel isn’t terrifically expensive for American visitors. However, our two journalist escorts confessed it was out of their price range and said this would be their first stay there.
(Since we received permission for our visit by agreeing to this “chaperone” arrangement, our colleagues needed to stay where we stayed….so it was only fair that my newspaper paid their wages for the weeks Jiro and I were there, and paid all their expenses, too).
Believe me when I say those two guys were enjoying every second of our stay. I think they especially liked watching Star TV, the satellite television service that was beaming its unfettered signal into Shanghai, from a then-still-independent Hong Kong.
After a couple of days there, and with the really heavy, hard-news reporting for our project well under way, the four of us planned a night-long tour of Shanghai’s finest nightclubs (including one called “New York, New York,” whose classy name was belied by its knotty plywood walls adorned with a truly horrid painting of the Big Apple’s nighttime skyline). Our stated objective was to interview Shanghai’s new-and-growing group of Yuppies about how the wave of capitalism washing over their city was changing their lives.
Jiro and I waited for our new, meticulously punctual friends to come upstairs and meet us. But when minutes stretched into first a quarter-hour, and then a full-half hour, the two of us figured we’d better head downstairs to find out just what the problem was. A knock on their door had to be repeated three or four times before one of the Xinhua guys yanked it open, and then raced back to his seat next to his colleague at the very foot of the bed.
The scene that was before me is burned into my memory. These two China journalists – one about 24 and the other 54 – were seated on the last few inches of the foot of the double bed, were both leaning forward at an identical angle, and were both clearly mesmerized by what was in front of them
It was a big TV.
And it was tuned to Baywatch.
A Rising Tide That Lifts All Boats
I call that moment my “Emerging Markets Epiphany.” Sure, I’d read about China’s surging economy hundreds of times. I knew all about the Three Gorges hydroelectric project, and had read how a mountaintop had literally been leveled to construct a full-service international airport. And now that I was in Shanghai, I was amazed by the fact that I could stand and stare in any direction, and see towering cranes and high-rise buildings sprouting from the ground like Maryland Silver Queen Corn around the Fourth of July.
But it wasn’t until I saw our two Chinese guides, enrapt by this broadcast of the sunny adventures of Pamela Anderson and David Hasseloff, to really see the power and potential of emerging market growth. I mean, one of our two friends didn’t even speak English – though some things, I’m certain, have a universal meaning, and no words need be said.
In China, even back then, opportunities were blossoming, and incomes were soaring.
But I was no longer thinking about all this in terms of economic forecasts, GDP statistics, occupancy rates, or purchasing power parity.
I was analyzing it all in terms of individual people – the folks who were the future consumers of China.
At that instant, it was as clear as day.
They all knew what we had.
And they wanted it.
These aspiring consumers wanted their own houses, their own cars, their own electric appliances, cell phones, computers, and jewelry. They were willing to work to get it. And they were willing to pay.
With $1.2 trillion in foreign reserves – including $420 billion in U.S. Treasuries – China as a country is already a force in the world’s financial markets. It’s also a heavyweight in the markets for commodities.
If you don’t believe me, take a closer look at what you’re paying per gallon the next time you gas up your SUV. Don’t fool yourself into thinking that rising demand in China hasn’t helped “fuel” that surge in gasoline prices.
And this “China Effect” will spread – to varying degrees.
The “China Effect:” A Cause For Concern, A Source of Profits
One reason China is buying up companies around the world is because it’s lining up dedicated, captive suppliers of commodities of which there are dwindling, finite supplies. Americans should be scared to death over such prospects. But most folks don’t see it. Or don’t care.
You and I have no control over that problem. But we can profit from them.
And believe me, over the next several decades, there’s an immense amount of money to be made by either investing overseas, or by investing to profit from the growth trends being driven by development abroad.
That’s where gold comes in.
Gold is a precious metal, and it’s also a commodity. The wealthier newly minted consumers in China, India and Latin America become, the more they’ll want the same goods that households in America are buying. Jewelry, gold, gems, other precious metals.. these will all benefit from the growing ability to spend on wares that aren’t just necessities.
Right now, gold is trading in the area of $650 an ounce. But the folks atbelieve it could possibly go higher.
Indeed, by their estimates, gold could reach its peak in the all-time-record range of $1,500 to $2,000 an ounce.
Other metals will make a run for much-higher ground, too, Aden Research analysts predict.
There are caveats, to be sure.
But I couldn’t agree more with their analysis, for Aden’s analysts see one key catalyst for the huge run-ups we’ve already seen in the price of base metals, oil, uranium and gold.
That catalyst is China.
China has become the biggest worldwide consumer of such metals as copper, nickel, lead, zinc, tin and aluminum. Copper imports alone soared nearly 125% in the first three months of this year.
Just last month – underscoring the point I made about China locking up captive suppliers – the giant government-owned mining company, Aluminum Corp. of China, agreed to pay $792 million to buy Peru Copper Inc. – a deal that eliminates one of the last independent copper-miners in the world.
However, China’s government, its companies, and other firms operating in the China market are doing much of this spending. As China’s consumers ratchet up their spending, many other prices could surge, too.
And that includes gold.
Past bull markets in gold were inflation-driven; that is, investors seeking to hedge their bets against rising prices caused gold prices to skyrocket. Inflation will be a factor this time around, too. Gold prices usually move in the opposite direction of the U.S. dollar. With the dollar weak, and interest rates still relatively low, an uptick in inflation could send gold prices higher.
But if gold prices are really going to climb, consumer demand will have to provide additional fuel. And rising demand from increasingly wealthy consumers in China and India may be just the ticket.
What is the best way to play such a trend? There are the miners themselves, as well as gold mutual funds, precious-metals funds, and even Electronically Traded Funds, or ETFs, specializing in gold and other metals.
A good China mutual fund, or an ETF, will give you the long-term benefit of continued growth, enable you to ride out that economy’s inevitable ebbs and flows, and will provide some diversification, too. One fund that Aden Research recommends is the China Region Opportunity Fund (USCOX), which is managed by U.S. Global Investors (Nasdaq: GROW). I singled out U.S Global because it’s a company that several of our Money Morning analysts know quite well; its funds are well managed, and so is the company itself.