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China Default?

There's More Going On in China Than They're Letting On

Written by Brian Hicks
Posted March 21, 2014

Junior mining stocks softened this week as precious metals prices continued to sell off following the latest FOMC statement which rallied the dollar. Overall near-term technical strength still favors those long gold, but new bullish information to sustain the yellow metal is needed to avoid further erosion. Right now it looks like we could test $1,310 in gold and $20 for silver as the week comes to a close.

The junior miners reacted negatively to the news and have retraced some of their gains made in January and February. This is disappointing in the short-term especially after a robust show at the PDAC in Toronto.

In my view, most of these statements from the Fed and the FOMC are just lip flapping to get desired, short-term reactions from the market. I see the recent tapering announcements in the same light. Ultimately, with the U.S. government using 46 cents on every dollar they spend to service debt, there is plenty more fiscal insanity in store no matter what the Keynesian economic Fed banksters or politicians do and say in the short term.

Junior miners are in the early stages of recovery that I believe will continue to gain in strength and momentum. So far it is only a very select group of stocks that have moved, but as the recovery becomes more pronounced and the risk of the overall market lessens, the recovery will expand to a greater number of mining shares.

At this point there is a large group of investors that will only look at companies with little risk and won’t even consider exploration companies right now. But if I’m correct about a broader recovery sweeping over the bulk of the junior mining sector in 2014 and beyond, top notch exploration stocks are precisely the companies we should be buying in anticipation of this move.

Everything Might Not Be As It Seems in China

On the big picture side of the equation, there seems to be rumblings that all is not well in China. I have mentioned this before but, in my view, China could be the single biggest risk to the world economy and financial markets today.

There are rumors floating around this week that another Chinese corporation is in default on an interest rate payment on its bonds. A few weeks ago, the first corporate bond default occurred in China. China’s financial system has been suspect for quite some time. If the Chinese financial system becomes unmanageable, it would likely be a mixed bag for gold. It could limit consumer demand from the largest gold consumer in the world (China), but it could also prompt safe-haven demand for gold worldwide which would more than offset any loss of buying from China.

The issue at hand is that China is a state-controlled financial system funneling cheap money to well-connected and politically favored large enterprises.   

Fueled by a steady diet of cheap money, these companies keep adding capacity with no regard to profitability or return on capital.  They simply focus on producing more stuff and expanding their size while employing more and more people. It all sounds good until you understand they are borrowing more and more money and will eventually collapse under the debt load when liquidity dries up. 

Consider this: in the last five years, the Chinese created $16 TRILLION in credit that is now circulating in the economy… financing ghost cities and useless infrastructure projects. I have been there many times and witnessed this for myself. There are massive office towers of glass that you can see through because there are no tenants.

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Debt, War, and What It All Means for You

In the last two weeks, Chaori Solar and Haixin Steel were allowed to default, i.e. they weren’t bailed out. 

This is the first time in China’s modern history they’ve had a default, let alone two. They can no longer keep the game up, and the dominoes are beginning to topple. The country is debt ridden, riddled with mal-investment and threatening to implode.

The potential for a major crisis in China is now a very real possibility.

So now you can add China to a growing list of places (U.S., Japan, and Europe) that have unsustainable financial positions. To make matters worse, Tokyo and Beijing are squaring off with one another over the Senkaku Islands, the center of a brewing conflict between the two nations.

Richard Maybury explains the dilemma as such:

In October, Beijing’s official press agency called for governments to ditch the dollar as the world’s reserve currency. This must has angered US officials. They are going ahead with a new Marine base on Japan’s island of Okinawa. This island is the nearest outpost to the Senkaku islands that are in dispute.

Both countries (Japan and China) are proceeding with their military buildups. Ominously, for the first time, Tokyo is forming a marine corps. Marines are not a defensive force; their main purpose is to reach out and invade, and if you and I know this, so does Beijing.

Beijing has thrown “defense identification zone” around the Senkakus, while Tokyo’s prime minister has been cementing ties with the ten regimes of the Association of South-East Asian Nations (ASEAN).

This while the government of South Korea in Seoul appears to be cozying up to Beijing.

So on one side of the conflict we appear to have two governments, Beijing and Seoul, lining up against 12 on the other side — Tokyo, Washington, and ASEAN.

I mention these newsworthy items because we are seeing a major trend towards wars and rumors of war as the major financial players on planet earth are all reeling from imploding debt levels and failing fiat currencies. I guess the thought is if we can’t get away with our fiat currency scam anymore, we could always go to war.

In summary, when you consider the derivative problems of the major banks in the U.S. and elsewhere, the debt problems of all the major governments, and an issue of what is a true measure of value (failing fiat currencies don’t know how to value themselves one against another) the outlook for precious metals has never been better despite attempts to keep it under wraps at the moment.

Hopefully the world can avoid major wars, but it looks more and more like all the power seekers are itching to get into a war to hide problems at home.

Physical purchases of gold, silver, and platinum along with the quality precious metals mining shares should be a part of everyone’s portfolio.

Good Investing,

Greg McCoach for Wealth Daily

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