Is the Chinese Bubble About to Burst Gold?

Source: Daily Markets, Jeb Handwerger (12/13/10)

"It used to be that one had to watch a sneeze from the U.S., but precious metals investors need to also be aware of a sniffle from China."

The Fed has created another bubble in China. Investors globally have transferred devalued U.S. dollars and euros to buy Chinese property and equities. China has had to combat imported inflation with rapidly rising asset prices. An influx of capital has caused a real estate bubble, a rise in costs of basic goods, and excessive speculation in the commodity markets. The Chinese central banks will be observing the inflation data which should be coming out this weekend and will be compelled to act aggressively to prevent China from a bust similar to the housing crisis which occurred in the United States in 2007. Yesterday's IPOs showed that irrational exuberance is here once again, none since I have witnessed since the late '90s.

Investors are obsessed with China, just like the IPOs in the late '90s right before the tech bubble burst. Lessons should be learned from the tech bubble: Highly marketed IPOs should be viewed as a contrarian signal. Ironically, these latest IPOs come at a time when the Chinese central banks are committed to fighting excessive speculation.

International markets are going to carefully examine China's inflation data (to be released this weekend). This information should evoke central bank response by early next week.

It would be naive to think that a surprise hike in rates and a downturn in China would not put pressure on gold and silver, which are beginning to show signs of bearish reversals. A tightening policy in China could keep buyers away.

The demand and consumption of raw materials in China has a major impact on commodities. It used to be that one had to watch a sneeze from the U.S., but precious metals investors need to also be aware of a sniffle from China.

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