Don’t Want China Stocks? No Problem, Just Buy Gold

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

There really has been a sea change in global equity markets and it’s happened just in the last 12 months. For the first time in history, U.S. stocks are trading on Chinese news. Never before has such a developing economy affected the trading action in the world’s wealthiest stock market.

The reason why China’s news is so important to global capital markets is that it’s the only growth engine that anyone is paying attention to. What happens in China’s economy now affects sentiment on Wall Street, and stock futures trade on the news.

Naturally, this has an effect on your portfolio, whether you like it or not. But I’m worried about China’s influence on global capital markets. We can’t, in effect, rely on China’s growth to supplement our own. Eventually, China is going to experience the same thing that happens in all free economies — a business cycle. When the bubble bursts, I fear that this will hurt our capital markets in a disproportionate manner.

So, this means that equity investors have to be cautious going forward. While it’s important to have some exposure to China’s economy, I think it’s best to do so with a trader’s mentality. You’ve got to be ready to cash out at any moment.

We’ve been talking a lot about Chinese investment opportunities and you can invest in China’s growth without specifically taking on positions in Chinese companies. Quite obviously, you can just buy gold, gold stocks, or a gold future fund. This is the simplest way to make a bet on China’s growing economic appetite. China is buying the commodity like mad, because it needs gold as a raw material and as a hedge. Eventually, the pressure for China to float its currency is going to become a thorny issue with the rest of the world.

So, you can buy gold to play China’s growth. The added benefit in doing so is that you get to hedge yourself against weakness in the U.S. dollar and against the impending inflationary cycle. Gold. Gold. Gold. It makes more sense every day.