Adviser Soapbox: Follow The Golden Dragon

Adviser Soapbox
Follow The Golden Dragon
Curtis Hesler, Professional Timing Service 04.23.07, 6:30 PM ET

MISSOULA, Mont. -

I have talked in the past about the Chinese using their burgeoning foreign reserve stash to buy things they need, like raw materials. It would be much better for them to have a field full of copper ingots or silos of wheat than a vault bursting with depreciating U.S. dollars.

It is now official. The great Chinese investment fund has been established, and it is a whopper. They have announced that they will hold $650 billion of their reserves at ready, and they will invest the balance, along with $200 billion to $250 billion a year they expect to receive hereafter. That is a lot of money!

What will China buy? I believe they will spend some of their money on technology, both military and commercial. They will spend some on political influence. They will certainly spend a lion's share on raw materials and other commodities. This money will likely be the engine that will fuel the next major leg in the commodity bull market.

China will buy gold. They have every intention of being a significant player on the global scene, and to do that they will need to increase their gold reserves. Some experts estimate they will need to accumulate 2,000 to 3,000 tons of gold toward this goal. They will do this both directly and indirectly, with a little help from the population, which is enormous at some 1.3 billion souls. They have already legalized the ownership of gold for their citizens, and the citizenry is eagerly snapping up panda and "year of the pig" coins.

Consider this possibility. As the Chinese government trades depreciating dollars and other flat currencies they are forced to accept in their commercial activities for gold, they encourage their citizens to do the same--invest in gold. Then at some point when Western currencies are teetering or in a serious crisis, China can pull their trump card. They can call in the gold from the population (as Roosevelt did in 1933), and they can use it (along with government reserves) to provide gold backing for the yuan. They could suddenly end up with a highly desirable world reserve currency.

A bit of science fiction? Perhaps, but it's not really that far-fetched. Regardless, China is definitely gearing up to do some serious spending, and commodities will be the biggest beneficiary. Urban construction in China is moving at a pace that amounts to building a city the size of Houston every month. There are more sky cranes in the city of Shanghai alone than in the rest of the world. They are pouring a lot of concrete, stringing a lot of wire, plumbing a lot of pipe and pounding a lot of nails. It's no wonder copper is back above $3 a pound, which is, in itself, a sign that the recent correction in commodity prices is behind us.

A recession in China is not in the wings yet, by a long shot. China may cool off some day, but if it does, it will be from white-hot to red-hot. Gold paused last month, but there was not a noticeable sell-off as the late March cyclical lows came due. That is a bullish sign.

Silver has also done well recently. Our last silver recommendation was Silver Standard. Silver Wheaton is another one of our portfolio stocks. I like these stocks, but I encourage you not to concentrate your positions in any one issue. If you already have some Silver Wheaton, just hang on to it. Diversify new purchases elsewhere. Don't overlook Everton Resources. This one is, admittedly, a junior; and with that, there is some added risk. Nevertheless, the junior stocks on our list beat buying call options hands down. Gammon Lake still looks great, but I would stick with our $15 buy price.

Yamana Gold is hovering above our $13.00 buy price. If you don't have any, you should accumulate at $13 or less. Another solid core metal investment is Gabelli Global. It sports a decent dividend, and being a closed-end fund, it gives you a broad-based investment in metals. The downside is that because it is a portfolio of stocks, it will not be as volatile or promise the appreciation potential you will find in individual issues. Buy Gabelli at $23.80 or lower.

I have my eye on several new mining issues, but there is nothing that looks better to me right now than what is on our list. The key is patience. Wait for the market to sell off and then accumulate during weakness. The market cycles. Let it come to you.

Bottom line, if the metals don't sell off to our prices, I would just hang on to what you have. Gold's rally off the early October lows has been decent and orderly, but I feel there will be more profit-taking from this move than we have seen. Wait for weakness and then accumulate at our listed downside buy prices.

I firmly expect to see gold eventually hit $1,600 and silver to triple from today's price. That will put the mining stocks through the roof. As the commodity market improves, gold and silver will lead the way.

Curtis Hesler is editor of Professional Timing Service. Click here for more of Hesler's analysis and a complete list of currently recommended stocks in Professional Timing Service.