(From MIR of September 9, 2009)

Over the past weekend, G-20 Finance Ministers met to discuss compensation limits on bankers (the French-German view) and requiring banks to hold higher levels of capital (the UK-U.S. view).  In the end, a far more important piece of information emerged.  That nugget of information is that there is no exit strategy from the stimulus packages which were put in place over the past year.  There is no exit strategy.  The balance of risks are such that policymakers seem more than willing to overshoot stimulus on the upside, insuring global economies get sufficient traction so they can grow on their own.

Reflation oriented markets started to price this late last week.  Crude oil jumped, gold flew, silver which is more of an industrial metal has been very strong and stocks – led by metals, energy and materials – bounced again.  Most telling has been the price action in Chinese shares which started to trade up when Chinese authorities pulled the IPO calendar again and opened up the equity market to additional foreign ownership.  Chinese investors saw these announcements for what they are.  The Chinese authorities want stocks higher and they will do what they must in order to make that happen.  But it appears Beijing may have sent another signal as well.

According to Paul Mylchreest’s Thunder Road Report, China’s Central Television, which is the principal state-owned television company has run a news program advising how easy it is to buy precious metals.  The announcer is quoted “China has introduced its first ever opportunity for silver bullion.  The bars are available in 500g, 1kg, 2kg and 5kg, with a purity of 99.9%.  Figures show that gold was fifty times more expensive than silver in 2007, but now that figure has reached over seventy times.  Analysts say that silver has been undervalued in recent years.  They add that the metal is the right investment for individual investors and could be a good way to cash in.” (1)  Further TRP states, “Also for the first time in history, Chinese investors can even trade gold abroad (in London) with the swipe of a “Lucky Gold” card.” (2)

This is especially interesting.  It seems highly unlikely, if this story is accurate, that the Chinese government would make it easier for local investors to operate in the gold/silver market, so they can sell.  Chinese investors, unlike Indians, have generally not invested heavily in physical gold/silver. Their ownership levels of gold/silver are low.  That could be about to change as the government may be sending one of its famous signals to the locals, buy gold and silver.  I would not be surprised if the Chinese government is doing the same thing, in size.

The sleeper in this entire story could be silver.  A cross between precious/industrial metals, silver may be entering a period which is positive for virtually all the metals markets.  Your editor has been thinking more deeply about the effects of all the monetary stimulus shoved into the global system over the past year.  Now that the G-20 has blessed its continuation, is it possible this policy “push back” against a Kondratieff winter/depression will result in a stock market which goes much higher in 2009-2010, an economy which recovers into 2011 or even 2012 and a move in materials, energy, industrial/precious metals which surprises the consensus?  All that before the next crisis in 2011-2012?

Silver may be the stealth investment play in this scenario.  If the Chinese government is buying gold, why would they not buy silver?  If they are buying commodity producers and they are, why not buy silver producers where a triple play is available – on inflation, economic recovery and precious metals growing in importance in the global monetary system.  The scale of global money printing is seen in today’s charts.  It is without precedence and it is not finished.  Place your bets.

Sources:

(1) and (2)  Thunder Road Report, 1 September 2009.

http://economicedge.blogspot.com/2009/09/paul-mylchreest-thunder-road-report.html

Bloomberg Data & Bloomberg News