London , England

We got back from South America on Friday… ready for a rest. So, we spent the weekend reading… and occasionally, thinking.

What we’ve been thinking is that the dollar is dead meat in the long run. But in the short run, it might have enough life in it to bite investors on the derrière.

The US stock market rose 73 points on Friday, to bring the Dow just 30 points south of the 10,300 mark. Why is this level important? It’s not really. But it reminds us that this is still just in “bounce range.” Big drops in stock prices are followed by bounces – always. A bounce of 50% of what was lost is not unusual. That’s what happened after the Crash of ’29, for example. So, there’s nothing exceptional about what we’re seeing on Wall Street.

But here at the Daily Reckoning we’re not smart enough or fast enough to play the countertrends. We want investment positions that we can ignore for years… We want to be able to go on a long trip… say, down the Inca Road or over the Hindu Kush. And when we come back, we want to find that we have at least as much money as when we left.

If stock market buyers – in the US – have more money a year from now than they have now, we’ll be surprised. The private sector is still more than 2/3rds of the economy. And the private sector has begun de-leveraging. Nothing that has happened in the last 8 months makes us think that that trend is going to reverse any time soon. There are 70 million baby boomers who need money for retirement. They’ve got to save. That means cutting back on spending. And that means less income for business. Are stock prices really going to go up when business income is going down? No.

We leave our “Crash Alert” flag flying, here at the worldwide headquarters. We don’t know when… or IF… stock prices will crash. But the downside risk is not worth the possible upside. Daily Reckoning readers should be out of all US stocks, except those they wouldn’t mind holding through a 50% correction.

The other thing we mistrust – aside from politicians, stock promoters and tap water – is the dollar. But here the story is more complicated. Because the next downswing in stocks could push the dollar up! Everyone is betting against the dollar. And most think it is a one-way gamble. But it’s not like Mr. Market to grant investors a one-way bet. He’s got something up his sleeve.

Last week, the Financial Times reported that a group of IMF economists had made a “Plea to reduce demand for dollar reserves.”

That is another way of saying: find something else to put in your vaults rather than dollars!

To read the complete article at The Daily Reckoning, click here.

What’s he talking about? Today, we take a look and invest right alongside his idea. And it should start to pay off with the arrival of the first swallows of spring in 2010. It’s also timely now — in this weak-kneed economy — because it has traditionally held up well even in when the economy is on the ropes. Even the Great Depression couldn’t put this thing down.

We start with simple truths. The world’s population has more than doubled since 1950 — from about 2.5 billion to 6.7 billion. By 2050, there will be more than 9 billion people on the planet. Almost all of this growth will come from undeveloped markets such as China and India. And they will all be doing one thing, for sure — eating.

Now, hang on. I know that is a banal insight by itself, but this story has layers like a tiramisu. The second layer is the mix of food eaten, which is important. These undeveloped economies are getting richer. Predictably, as people everywhere have done and continue to do when they have a little more money in their pockets, they change their diets. They spend more on food. The average Chinese spends 40 cents of every additional dollar earned on food. In India, it’s about 70 cents of every additional dollar. What do they buy?

Read the rest of the story at PennySleuth.com.

“The issue is a disputed border between the two. They fought a 32-day war over it in 1962. China emerged victorious, but the whole thing settled nothing. The border between the two remains hotly contested. It is nearly 2,500 miles long and winds its way across difficult mountainous terrain. There is a northeastern state in India called Arunachal Pradesh, which China calls “Southern Tibet” and claims as Chinese territory.

“India claims last year there were nearly 300 border violations by Chinese troops and over 2,000 instances of ‘aggressive border patrolling.’ In the Indian media, it’s become a kind of sport to guess when China will attack India. And a recent essay by a Chinese analyst added fuel to the fire when it claimed China could ‘dismember the so-called “Indian Union” with one little move.’

“What would the effects be? It’s hard to say. But if the world’s two largest and fastest- growing emerging markets go to war, the results can’t be good for the global economy. China is even India’s largest trading partner. It all depends on how it unfolds.”

Chris will be getting a frontlines view of this flash point over the next few weeks. He and our executive publisher Addison Wiggin will be scouting potential joint ventures in the UAE and India from this weekend until mid-October. For highlights, be sure to check your daily 5 Min. Forecast. But for the nitty-gritty — and actionable advice — keep your eyes open for our new BRIC report… it’ll be ready very soon.

Source: Think China vs. India

China has used depressed commodities prices to stock up on long-term supplies of raw materials such as oil, copper, and iron.  And it’s used structural weakness in the U.S. financial system as justification for replacing the dollar as the world’s main reserve currency.

Now, the Red Dragon is looking to make headway on the highway by winning global market share in the automotive market while U.S. heavyweights spin out.

“We aren’t afraid of the financial crisis,” Zhou Fuquan, vice president of Geely Automobile Holdings Ltd. (PINK: GELYF), told Bloomberg News. “On the contrary, we hope it will penetrate even further as it has provided us with some opportunities.”

Geely is China’s biggest private automaker, but that isn’t exactly saying much. The company’s annual output is just 300,000 units, and its market share in China is a meager 3%. Still, Hangzhou- based Geely is determined to become a global player in the auto industry. It has ambitions to sell 2 million cars a year, including 1.3 million overseas – even though right now the company generates just 5% of its sales from abroad.

Of course, that’s why the financial crisis has been more of a financial opportunity for Geely. In March, Geely bought key assets from bankrupt Australian gearbox maker Drivetrain Systems International – the world’s second-largest maker of automatic transmissions.

“The economic downturn provides us with very good overseas acquisition opportunities,” Daniel Dai, vice president for international business at Geely, told China Daily. “We get the best technology with the best price.”

Geely has also set up a joint venture with Manganese Bronze Holdings PLC (MBH) to produce the TX4 London Taxi in Shanghai. MBH supplies taxis to Saudi Arabia, Turkey, and Spain as well, boosting Geely’s global presence.

For months, analysts have speculated that Geely will continue to its overseas expansion by launching a bid for Ford Motor Co.’s (NYSE: F) Volvo unit. Ford, which is the only “Big Three” auto company to not receive government aid, last December started looking to offload the Swedish car brand in an effort to pay off the debt it accrued when the company borrowed $23.5 billion in 2006.

Geely said on Sept. 9 that it might partner with a state-owned investment company to bid for Volvo. And earlier this week, the company announced that it would raise $334 million in funds from Goldman Sachs Group Inc. (NYSE: GS) through a convertible bond offering to “fund the capital expenditures of the group, potential acquisitions by the group and for general corporate purposes of the group.”

However, some analysts have pointed out that the Goldman capital falls well short of the roughly $2 billion Ford is asking for Volvo. They believe Geely instead will use the money to increase capacity and market the models it already has to buyers outside of its home market.

“The management is planning to expand its distribution channel to foreign countries,” Richard Li, research director at Celestial Asia Securities Holdings, told Forbes magazine. “This deal can provide this company enough funds so that the cash flow will be upgraded long term.”

And if nothing else, Goldman’s investment could be enough to instill investor confidence in the small Chinese carmaker.

Almost a year ago to the day Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) subsidiary MidAmerican Energy Holdings Co. agreed to pay roughly $230 million for a 9.89% stake in Chinese car and battery producer BYD Co. Ltd. Since then, BYD’s shares have jumped more than fivefold in that time.

“A big name investor certainly helps boost stock prices and brand recognition,” Li Lixi, a Northeast Securities Co. analyst in Shanghai, told Bloomberg. “Goldman’s investment in Geely may repeat the impact that [Warren] Buffett had on BYD.”

Geely’s Hong Kong shares yesterday (Wednesday) surged to their highest in more than nine years on the news of Goldman’s investment.

The Race to Build a Competitive Chinese Brand

Geely isn’t the only Chinese companies looking to use the financial crisis as an opportunity to broaden its global reach either. Other Chinese companies, including Beijing Automotive Industry Holdings Co. (BAIC), SAIC Motor Corp. Ltd., and Sichuan Tengzhong Heavy Industrial Machinery Co., are determined take the lead in what has become a race to be the first world-renowned Chinese automotive company.

“It takes decades to establish a recognized, renowned brand,” Jim Hossack, an industry analyst at researcher AutoPacific Inc., told Bloomberg. “China wants to do it much faster, perhaps within as little as five years.”

BAIC on Sept. 9 joined Koenigsegg Group in its bid for GM’s Saab division. Koenigsegg – backed by U.S. and Norwegian investors – in June agreed to buy Saab from GM, but struggled with financing the deal.

SAIC group, the parent of China’s largest automaker, had also considered coming to Koenigsegg’s aid in the Saab bid. But ultimately it was BAIC that came through with the $420 billion in financing needed to close the deal.

“This is a great opportunity for us to partner up with a brand like Saab that we believe has a great future with a new business plan and new ownership,” Wang Dazong, general manager of Beijing Auto, said in a statement posted on its Web site.

Koenigsegg and BAIC will form a joint venture to market Saab cars in China, where the brand has little-to-no presence. BAIC will also gain valuable technology from the Swedish car company.

“Chinese manufacturers are hoping to buy up technology that will help them catch up to world standards on both the product and the development side more quickly than they would on their own,” Christoph Stuermer, automotive analyst at IHS Global Insight Inc., told the Financial Times.

However, not every Chinese endeavor has been greeted with success. Shanghai-based SAIC in 2004 paid $500 million for 49% of Ssangyong Motor Co. just to watch the South Korean carmaker go into receivership in February. And Sichuan Tengzhong Heavy Industrial Machinery’s attempted takeover of GM’s Hummer brand is still being stalled by China’s central government.

“It’s not in coordination with our nation’s industrial policy,” Vice Minister of Commerce Chen Jian said after sending back Sichuan’s application to acquire the Hummer brand for $100 million.

Still, Chinese auto companies won’t be satisfied until they race ahead of their Western counterparts.

“I’m fighting for what’s in overseas automakers’ rice bowls,” Geely founder Li Shufu told Bloomberg. “I want to build Geely into a global first-tier automaker.”

Source: Financial Crisis Gives Chinese Car Companies a Chance to Get Up to Speed

Mittal is the chairman and largest owner of ArcelorMittal (NYSE:MT), the world’s largest steel company. Therefore, his words carry some weight in the steel markets. The fact that these words are so contrary to what everyone else seems to think is significant…

Mittal is singing a rosy tune that has the market atwitter. He thinks steel demand could grow more than 10% in 2010, which would be a strong rebound, indeed.

Whether Mittal turns out to be right or not will hinge on what happens in China. China makes up about half of the world’s steel demand. That’s where the controversy begins, because there is just a lot of uncertainty over China’s economy right now.

I think it’s noteworthy that even those who think Mittal is way too optimistic are still calling for a 5% increase in steel demand next year. The contraction in demand was so severe and happened so quickly in 2009, it is hard to imagine steel demand not rebounding some next year.

Source: Steel Sector: Still Suffering or Rebound Ready?

But while many analysts are focusing on threat of inflation – which could be a byproduct of the U.S. Federal Reserve’s reluctance to withdraw monetary stimulus – investors should really be watching China.

“In the post-financial crisis global economy, China is quickly becoming the proverbial ‘800-pound gorilla’ – the player that has to be courted, but that can’t be tamed,” said Money Morning Contributing Editor Peter Krauth.

In a recent article for Money Morning, Krauth said that he believes the stage has been set for gold to make a lasting run above $1,000 an ounce, in no small part because of China.

For the past six years China has quietly been stocking up on gold, boosting its holdings of the yellow metal to 1,054 metric tons from 400 metric tons in 2003.

What’s more is that earlier this year, the government finally made it legal for Chinese citizens to make their own purchases of the yellow metal.

As recently as 2002, the private ownership of gold was prohibited in China, with jail as the penalty for possession.  But now the government executed a stunning about face and removed all such restrictions. In fact, Beijing is actually encouraging its citizens to purchase the precious metal through state-run media.

China’s Central Television, the nation’s main state-owned television company, is now running news programs, which strongly resemble infomercials, explaining just how easy it is to purchase gold and silver as an investment.

“Simply put, the Chinese government is trying to trigger a national gold craze…and it’s working. The Chinese public now has gold trading platforms on steroids,” Paul Atherly, managing director at Leyshon Resources Ltd. (OTC ADR: LYRSY), said in an investor presentation in London.

Physical gold demand from private Chinese households rose 9% in the first half of this year, due to an “unprecedented” sales push across rural China, according to Gerry Chen, the World Gold Council’s local business development manager.

Most banks in China already offer customers gold and silver bullion bars in four different sizes ranging from one to five kilograms.

A Golden Opportunity?

Of course, it’s not just the Chinese public that is interested in stepping up its gold purchases. Even though China has nearly tripled the size its gold reserves in the past six years, the declining value of the dollar has given the Red Dragon even more incentive to stock up.

China has about $2 trillion in foreign currency reserves. The vast majority those holdings are in dollar-denominated securities, and therefore are susceptible to the declines in the value of the greenback.

The dollar was been in a precipitous freefall for years before the financial crisis hit in full, sending droves of investors flocking to shelter of the U.S. currency. But now that the global downturn is being to abate, many investors have regained their appetite for risk, and the dollar has resumed its decline.

The dollar has lost 2.5% to a basket of six currencies this month and nearly 5% since early July.

China’s Cheng Siwei, former vice chairman of the Standing Committee of the Chinese Communist Party, recently told Great Britain’s Telegraph newspaper that “If [the Fed] keep[s] printing money to buy bonds, it will lead to inflation, and after a year or two, the dollar will fall hard. Most of our [Chinese] foreign reserves are in U.S. bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen and other currencies.”

Gold provides China with an excellent opportunity to diversify away from the dollar. Many of the nation’s top policymakers agree, but there’s a question of timing.

“When we buy, the price goes up,” Siwei noted. “We have to do it carefully so as not to stimulate the markets.”

From 2003 to 2009, China spread out its gold purchases over a long period of time and relied heavily on Chinese producers.

But this time around there may be a shortcut, because the International Monetary Fund (IMF) has formally endorsed a plan on Friday to sell 403.3 tons of gold – equal to about one eighth of its holdings – to central banks or in the gold market. Gold demand was 3,880 tons last year, according to the World Gold Council.

That presents China with a tremendous opportunity, because if it decided to buy the gold, China would be able to seek a discount from spot prices, since a market sale would put downward pressure on bullion prices.

“China only has about 1,000 [metric tons] of gold reserves and the investments in other assets are performing not very well,” one official, who declined to be named, told Reuters. “I think we should build up more gold with foreign reserves, but when to buy is the key. It’s a good idea if China can buy the gold from IMF at prices well below market level.”

The Chinese are currently being converted from being the lowest per capita gold consumers in the world to a nation of small precious metals investors. By next year, Chinese gold consumption will likely overtake India, which has been for years the world’s biggest gold market.

With global gold production at best flat and probably in decline, even a small increase in Chinese buying could have a substantial impact on gold prices.

“The lesson here is clear: China’s growing appetite for gold is a powerful trend that will benefit gold investors for years – even decades – to come,” said Money Morning’s Krauth.

According to Krauth, “the biggest bang-for-buck still lies with the junior gold sector. The best proxy for this is the S&P/TSX Venture Composite Index (CDNX),” otherwise known as the Toronto Venture Exchange. It consists of about 75% resource stocks.

The CDNX has been steadily carving new highs almost uninterrupted since March, now posting a whopping 80% gain since its December 2008 low. That’s an impressive performance.

The players in this sector promising the best returns are the junior gold-and-silver companies either already producing, or with near-term production.

“With gold breaking and sustaining the $1,000 barrier, junior gold and silver miners are the place to be for explosive returns,” said Krauth. “Just hold onto your hat.”

Source: How China became the ‘800-Pound’ Gorilla in the Gold Market

No, this rally had another factor pushing it: our friends in the Far East. The Chinese have been quite vocal with their concern over the US dollar and have increased their official gold reserve holdings by 75% in the spring. Smart move.

In the Weekend Edition’s Highlight of the Week, Bill Bonner looks closely at where the recent rise in gold prices puts our “Trade of the Decade.” Read on…

Gold took off [Wednesday]…closing at $1020. Here at The Daily Reckoning, we’re impressed. But we’re not that impressed. Gold, of course, is half of our Trade of the Decade, which we announced almost 10 years ago. We’re bullish on the metal…have been for a very long time. But recent comments in this space have made readers wonder what the Hell is going on…so we will spend a few minutes clarifying.

First, we hope you bought gold many years ago. That would make it simpler. Then, we could say: hold! Gold is an antidote to paper. There is so much paper…and so much more apparently on the way…that the gold play seems like a winner. It’s a bet that the money system that has been around since August ‘71 is going to fall apart.

We still think that is a good bet. Our Trade of the Decade remains. Buy gold on dips; sell stocks on rallies. We’ve done well with this trade; we’ll stick with it a bit longer.

But what if you don’t own gold? The yellow stuff is now over $1,000. In fact, it looks like $1,000 could be a new support level for the metal – with most of the support coming from the Chinese. China has relatively little gold in its central bank. It must see what we see – the weakness of the dollar and of the dollar-reserve monetary system. It must worry about the value of the $2 trillion or so it has in dollars. It must also wonder how it is going to run its economy if the dollar falls apart. American buyers were its consumers of first and last resort. To whom will China sell if its most important customers’ money becomes worthless?

Recent comments by a group of Chinese officials make it clear that they are thinking of these things…and that they have decided to add more gold to their reserves. In fact, all the central banks have become net buyers. No more selling off gold reserves. That is seen as a mug’s game – which it is. Replacing gold with paper? C’mon, what were they thinking?

So China is a buyer. Trouble is, it has to be a discreet buyer. It has too much money. It could cause the price to skyrocket overnight. Then, it would be paying too much. So, perhaps it does what we do – China buys on dips! For example, the order may have gone out: buy gold whenever the price goes below $1,000.

We don’t know what their buying strategy is…but the Chinese are probably going to be big buyers over the next few years.

Should you buy along with the Chinese? Should you compete with the Chinese for each ounce of gold that comes on the market?

Good question. Unfortunately, we don’t have a good answer. So let’s try a different question: Is gold going up or down?

The answer to that is simpler: gold is going up…then down…then up again. It is going up because the feds – including the feds in China – are encouraging speculation. Then, it is going down when the next phase of the bear market reasserts itself and the speculators run for cover. Then, it is going back up…much farther and faster…when the Fed becomes desperate and finally throw caution – and dollars – to the wind. We’re confident this last stage will arrive. Our hesitation is that it will take much longer than we expect. Gold may rise in a deflation…but it soars in a period of inflation. That period could be a long way off.

The above is just an excerpt from Bill’s standout essay from this week. You can read it in its entirety here.

Well, that does it for us…enjoy the rest of your weekend,

Kate Incontrera

Source: China Gets in on the Trade of the Decade

Guess what happened last year? According to a study from Boston Consulting Group, the only area of the world that got richer last year was Latin America… led by Brazil!

The rest of the world got poorer. By 11%, according to BCG. Down in the rum and sun zone, on the other hand, they got 3% richer.

So maybe our investments in South and Central America will turn out all right after all.

Meanwhile, back in the developed world… what’s going on? There are two main schools of thought. Ours. And theirs.

Who’s right? You decide.

They say – the crisis is over. We can thank our lucky stars – and the feds.

Now, we’re getting back to ‘normal’… or maybe a ‘new normal,’ with lower growth rates than before. Janet Yellen, San Francisco Fed governor, says the recovery will be ‘tepid.’ Others say it will be weak… soft… drawn out.

“The slowest recovery since 1945,” says a Bloomberg report.

It may be slow, they say, but it’s sure. The stock market proves it.

Stocks are up 65% worldwide, with the US a laggard… stocks in the US are up barely 40%. The Dow rose 21 points yesterday – still a long way to go to get to the 50% rebound mark, at 10,300.

Gold closed down, but still over $1,000. And the dollar continued falling – reaching $1.46 per euro.

In our view, there is no recovery. None. All of the improvement in the economy can be traced directly to bailouts. None of it – not a single penny – is organic, natural or durable. When the subsidies for new cars go away, for example, so do auto sales.

We wrote a book, with Addison Wiggin, several years ago. In it we predicted that the US would follow Japan into a long slump. We thought it would begin after the tech crash of 2000. We were wrong about that. But it seems to be beginning now. And the government, predictably, is doing the same things the Japanese government did – despite Bernanke’s assurances that he won’t allow the country to fall into the Japanese deflation trap.

One thing the Japanese did was to reduce interest rates… practically giving away money to anyone who would borrow it. But Japanese consumers didn’t want to borrow; they wanted to save. They had speculated on the bubble and lost money. Then, with retirement approaching they wanted to replenish their savings and rebuild their balance sheets.

So, the Japanese government put out money… and it was taken up by speculators, not by the real economy. The speculators borrowed yen, at very low interest rates, and then reinvested the money in go-go sectors elsewhere – such as the US dot.com bubble. The yen became the world’s “financing currency.” If you wanted to build a factory in China or speculate on Argentine bonds, you could begin by borrowing cheap money from Japan. Thus, Japan contributed to a huge boom all over the world. But not in Japan. The land of the rising sun never seemed to get up in the morning. Property investors lost 80% of their money. Stock market investors lost as much. Even now, nearly 20 years later, they’re still 75% down.

And now, along comes the United States of America with super-low lending rates. But who’s borrowing? Not the moms and pops of Middle America. They don’t have anything to borrow against. And the banks won’t lend to them. The banks need money for themselves. Besides, everybody knows the average household in America is losing income.

What’s more, mom & pop don’t want to borrow. They’ve been through 10 years of losing money on Wall Street. Stocks are no higher now than they were a decade ago. And their houses – on whose rising prices they had counted for their retirements – have gone down 20% – 40%. And they’re still going down.

The poor moms & pops can’t seem to get a break. They’re now desperately saving for retirement – at the worst possible moment, when jobs are scarce and wages are falling. But what else can they do?

Spengler, in Asia Times:

“An aging population increases its purchases of securities and decreases its purchases of goods as it saves for retirement. Americans have saved nothing for the past 10 years, and the capital gains that they considered savings-substitutes have vanished. That means that an enormous savings deficit accumulated over more than a decade has been exposed, and that Americans must attempt to correct it quickly and under the worst of circumstances. Americans will work more, spend less, and save more. America may have the worst of both worlds: currency devaluation and price deflation, as in the 1930s.”

*** So, the feds push money into the economy, but it’s hot money. It’s money that speculators use to place bets on gold… or on Brazilian bonds… or on oil exploration companies. The money never ends up in consumers’ hands. It never bids for consumer goods. It never pushes up consumer prices.

As in Japan during the ‘90s, America’s hot money may go all over the globe. It may turn the entire world into a casino. But it won’t bring about a real recovery…

…if cheap money from the government were all it took to bring prosperity Zimbabwe would be richer than Switzerland. Obviously, it doesn’t work that way.

But here’s the shocker. While we know easy money policies don’t create prosperity, you may be surprised to learn that they don’t necessarily cause inflation either. In other words, government may be incompetent, even at what it does best.

So, why is gold rising?

Ah… we were afraid you were going to ask. We’ve been doing a lot of thinking about it. Partly because our family office partners are smart fellows who ask smart questions. And partly because we’re wondering what to do with our own gold. Buy? Sell? Do nothing?

We spent half the night drinking and meditating on the subject. Finally, we’re not sure we had a clearer idea… but at least we were able to sleep.

We’ve already unveiled the idea to you. The feds can cause speculation in gold; but they can’t easily cause consumer price inflation. As explained above, they can get cash into the hands of speculators, but not into the hands of consumers. Not in the middle of a major consumer retrenchment.

The Roosevelt Administration was faced with the same problem. But back then, gold and the dollar were linked. Roosevelt could devalue the dollar by edict. The Japanese couldn’t do that. Nor can the Obama Administration.

In a deflationary credit cycle, you may only be able to cause consumer price inflation by resorting to extraordinary Zimbabwe-style money printing. You can drop money from helicopters, as Ben Benanke promised. But as Zimbabwe demonstrated, that cure is far worse than the disease it is meant to heal.

All of that said… gold can rise… partly because people are betting on it as an antidote to inflation (not realizing that consumer price inflation may be a long way off)… and partly for other reasons.

Lately, one of those other reasons may be heavy buying by the Chinese. The Middle Kingdom wants to diversify out of the dollar. It also has a central bank with very little in gold reserves. What better to do than to diversify out of the dollar by adding gold to its central bank reserves? Word on the street is that it is buying steadily.

The Chinese have made a number of announcements on the subject. We don’t really know who’s in charge there, so we don’t know whose comments to weight most heavily. One Chinese official has said that the government is buying gold and intends to buy more. Another says they will buy “when people don’t expect it.” Another says the Chinese expect gold to go to $3,000 an ounce.

The Chinese have the money and the motive. They alone could move the price of gold to $3,000 if they wanted to. And maybe they do.

Until tomorrow,

Bill Bonner

Source: What China Could Do to the Price of Gold

Fast-growing industry and a reliance on coal-fired power plants turned China into the world’s largest emitter of greenhouse gas a few years ago. Clouds of smog far thicker than that of Los Angeles hang over many of its cities and much of the water is densely polluted. But that’s something the central government aims to change.

China plans to reduce energy consumption per unit of its gross domestic product (GDP) by 20% of 2005 levels by the end of next year. It’s more immediate goal is to reduce reliance on coal-fired plants to 60% of its energy production from 70%, and replace with renewable energy sources like wind and solar.

Since 2007, about 54 gigawatts – about 7% of the nation’s electricity-generating capacity – of coal and oil-fired power plants have been closed down as part of the effort to reduce carbon emissions.

Alternative energy sources, including wind, solar, and hydropower, are in line to replace fossil fuels. China’s market for green technology could reach $1 trillion annually, or about 15% of the country’s forecast 2013 GDP, according to a report released last week by the China Greentech Initiative and the American Chamber of Commerce.

“Climate change brings a range of new risks and challenges for business, but it is also creating huge opportunities, particularly in the greentech sectors,” Richard Gledhill, global leader on climate change and carbon market services for consultancy PricewaterhouseCoopers, told the People’s Daily. “The International Energy Agency predicts that we will have to spend an additional $9 trillion over the next 20 years to deliver a stabilization scenario of two degrees Celsius.”

Already solar companies in China are benefiting from the government’s push for clean technology.  China plans to install more than 500 megawatts of solar pilot projects in two to three years.

“Given the nascent nature of China’s solar domestic market, this 500 mW program, though not huge, sends a strong signal that China is serious about developing its domestic solar market, and will undoubtedly stimulate more activity in domestic deployment by enterprises outside of the subsidy program,” Julian Wong, a senior policy analyst with the Center for American Progress, told the People’s Daily.

The central government could raise its 2020 solar power generation target more than fivefold to at least 10 gigawatts, the paper reported. Analysts expect that more than two gigawatts of new solar capacity will be installed by 2011, up from about 100 megawatts in 2008.

To help the country meet its goal, the central government in July said it would subsidize 50% of investment for solar projects as well as transmission and distribution systems that connect to grid networks. The subsidy rises to 70% for independent photovoltaic power generating systems in remote regions of the country that have no power supply.

However, Chinese solar companies aren’t just benefiting from the growing market of the mainland. Many are now building factories in the United States to bypass protectionist legislation. They’re also encouraging executives to join industry trade groups to squelch any anti-Chinese sentiment.

One such company is Suntech Power Holdings Co. (NYSE ADR: STP), which earlier this year said it plans to build a factory in the Southwest United States. The company said it is exploring opportunities in several states as it seeks to expand its presence in the U.S. solar market.

“It’ll be to facilitate sales — ‘buy American’ and things like that,” Steven Chan, Suntech’s head of global sales and marketing told The New York Times.

However, Suntech Chief Executive Officer Shi Zhengrong told The Times in an interview that 90% of the workers at the $30 million factory will be blue-collar laborers welding together panels from solar wafers made in China. And because of the generous subsidies it receives from Beijing, Suntech can sell solar panels on the U.S. market for less than the cost of the materials, assembly and shipping.

Yingli Green Energy Holding Co. (NYSE ADR: YGE), another large Chinese manufacturer, announced last week that it also had a “preliminary plan” to build solar panels in the United States, The Times reported.

Suntech is on track to pass Germany’s Q-Cells SE as the world’s No. 2 supplier of photovoltaic cells. After losing $69 million before interest and tax in the first half of the year, Q-Cells said it would cut 500 jobs – nearly a fifth of its workforce. Two other German solar companies – Conergy and Solarworld – also reported steep losses and are fighting for survival.

“A large part of the German solar cell and solar module manufacturers will not survive,” UBS AG analyst Patrick Hummel told the Financial Times Germany newspaper.

Both Conergy and Solarworld have accused Chinese manufacturers of dumping and called on Western governments to protect the solar industry with import tariffs on Chinese products. But so far there has been no action on the part of U.S. and European governments.

“It’s absolutely disgraceful that [U.S. President Barack] Obama is going around the world saying we will not resort to protectionist measures against China when they’re stealing the solar-panel business out from under us,” Peter Morici, an economist at the University of Maryland and former chief economist of the U.S. International Trade Commission, told The San Diego Union-Tribune.

Morici noted that China’s protectionist measures include a requirement that 75% of the content of government-purchased solar panels be Chinese-made. The United States has no such requirement.

In response to critics, Suntech’s Shi insists that his firm is helping the solar industry by making the technology more affordable.

“Western countries worry about the dramatic price reduction and talk about dumping. That shows a protectionist attitude. That’s wrong,” Shi told the United Kingdom’s Guardian. “We must work together to promote and utilise each other’s strengths.”

China recently  took a big step toward enhancing cooperation with Western solar companies by signing a deal with the Phoenix-based First Solar (Nasdaq: FSLR) to build the world’s largest solar plant.

The 2,000 megawatt complex will be built in Ordos City in Inner Mongolia by 2019. At that size, it would be about 30 times larger than any existing solar power stations in Europe.

“There are a few existing solar projects of about 50 to 60 megawatts, but this would be the biggest by a country mile,” Charles Yonts, an analyst specializing in alternative energy at CLSA Ltd. in Hong Kong, told Bloomberg. “China is suggesting the solar market will be up to 20,000 megawatts by 2020, but the scale of this project suggests these estimates are far too conservative.”

First Solar will consider solar module and manufacturing sites in Ordos City as part of the agreement.

The deal raised the eyebrows of many industry leaders who were skeptical about China’s willingness to work with Western companies.

“If you announce that we have such a huge need for solar panels that we are even going to put First Solar panels into China, all of a sudden we’ve gone from this massive threat to maybe we saw it the wrong way around,” Stephan Dolezalek, managing director of Silicon Valley-based venture capital firm VantagePoint Venture Partners, told Reuters.

“Maybe we should see the size of the Chinese market as this enormous upside potential, and maybe all of solar should be seeing it much more positively.”

BrightSource Energy Chief Executive Officer John Woolward said his company is moving “slowly and deliberately” to find a partner in China, while Tom Werner, chief executive of the California-based SunPower Corp. (Nasdaq: SPWRA) said the deal “clearly makes use more bullish on China.”

“We hope that that will result in us being able to penetrate that market as well,” he added.

Source: Solar Energy’s Future Shines Brightest in China

However, a report from the International Energy Agency (IEA) indicated that demand is recovering more quickly than previously thought, and that OPEC may be playing catch-up as the global recovery gathers steam.

The IEA increased its outlook for global oil demand by nearly 500,000 barrels per day (bpd) for 2009 and 2010, to 84.4 million and 85.7 million bpd respectively.

Perhaps the biggest reason for the increase was surging demand in China, where the Red Dragon’s $587 billion (4 trillion yuan) stimulus plan has resuscitated manufacturing and helped China grow into the world’s largest auto market.

China’s imports of oil hit a record high in July, soaring 18% from the month prior to 19.63 million metric tons, or about 4.64 million barrels a day, according to the nation’s General Administration of Customs.

China’s economy grew by 7.9% in the second quarter, and Beijing estimates 8% growth for the year, compared to an expected 3% dip for the United States.

Chinese demand for oil this year will grow by 2.8%, according to the IEA.

“I am more confident today than what I was back in May,” about China’s economic recovery, Saudi Oil Minister Ali Naimi told Bloomberg.

The rise of China has been a tremendous boon to OPEC – which controls 40% of the world’s oil supply – particularly since the financial crisis has crimped oil demand in developed nations around the world.

“We’re looking East more these days,” said Kuwaiti Oil Minister Sheikh Ahmad Abdullah al-Sabah.

The IEA expects demand for oil in North America to plunge 4.4% this year. However, that figure is an improvement from last month’s forecast of 5.1%, and could accelerate further as the recovery gains momentum.

Data for gasoline and heating oil consumption in June showed a “hefty” increase in demand the IEA said. That data was further substantiated yesterday when the Energy Department reported a larger-than-expected drop in inventories.

Inventories dropped by 5.9 million barrels for the week ended Sept. 4 – more than three times estimates of analysts surveyed by Platt’s, the energy information arm of McGraw-Hill Cos, according to The Associated Press.

Indeed, even Saudi oil minister Naimi has acknowledged the bullish shift in the market.

“You guys must realize that there is a fundamental change in the market,” he told reporters ahead of the night-time meeting that agreed to keep supplies officially unchanged.”Economic growth is the name of the game, that’s what’s going to drive the price. As long as economic growth is there, the price is going to go up.”

Still, OPEC remained cautious, opting to keep production level until demand in the West returns to its pre-crash levels. Of course, that means the cartel will likely be playing catch-up, boosting production behind price increases as the economic recovery gains momentum.

Oil prices have more than doubled from their February lows, closing yesterday at $72.17 a barrel on the New York Mercantile Exchange (NYMEX).

Goldman Sachs Group Inc. (NYSE: GS) has raised its 2009 oil price forecast to $85 a barrel from $65 and said prices would reach $95 a barrel in 2010.

Source: Oil Prices Gaining Momentum as OPEC Keeps a Lid on Production