SAN FRANCISCO (ResourceInvestor. com) -- The dollar lost another 0.4% against the euro Monday after tumbling to a 1 1/2-year low against the euro on Friday. Gold futures gained nearly 2% as the euro traded at $1.313. Most of the speakers at the San Francisco Hard Assets Conference are in agreement - the U.S. dollar is heading lower and precious metals are heading higher.
Ron Paul, Congressman for the U.S. House of Representatives, slammed the sentiment home today when he said, "We are living on borrowed money and borrowed time and that will eventually come to an end."
"We are facing serious economic problems," he said. The fact that "the government can literally create money out of thin air is a recipe for disaster."
James Turk, founder and chairman of GoldMoney.com, said when central banks, such as the Bank of China, are diversifying away from the dollar, "there's something wrong."
However, analysts disagree about what impact a slowing U.S. economy would have on China and its demand for base metals and other pure commodities.
Yesterday, Marc Faber, Editor of the Gloom, Boom & Doom Report, said that an U.S. economic slowdown will not curb China's growth. He said Asian exports will continue to rise despite a slowing U.S. economy, and thus China's demand for commodities will remain strong.
However, Paul van Eeden, President of Cranberry Capital Inc., said consumers will spend less, meaning the U.S. will import less, and this will negatively impact China with 30% of its GDP gained from exports.
Van Eeden said copper, aluminium, lead, zinc and molybdenum prices have all been driven up this year on soaring demand from Asia and speculation by financial institutions. He said a fall in demand from China would force these financial institutions to pull out completely.
In recent study entitled "The Coming Nuclear Winter Base Metals," Frank Veneroso agreed that speculation by hedge funds has resulted in the price increases in base metals.
"If hedge funds have been managing base metals prices, eventually these funds and the base metals should go the way of Amaranth," he said. "I believe it is the activities of these funds and their eventual failure that will determine the price break that begins the inevitable deep decline back to marginal cost for this complex."
He said any economic weakness somewhere around the globe would result in record sustained surpluses and a "mountain of inventory."
In an issue of the Financial Monitor, Martin Murenbeeld, Chief Economist of Dundee Group of Companies, actually calculated the effect that past U.S. recessions had and found that "China is not as dependent on the U.S. economy as one might have thought."
According to Murenbeeld, for the seven years (not counting 1960) that the U.S. economy was in recession, the average increase in Chinese exports as a percent of GDP was 0.14%, with a range of -0.75% in 2001 to 1.29% in 1991.
"U.S. recessions don't seem to hurt Chinese exports in any consistent manner!" Murenbeeld exclaimed.
He added that for the same seven years the change in U.S. imports as a percent of GDP averaged -0.09%, meaning that "U.S. recessions do hurt U.S. imports in a consistent manner!"
A U.S. recession might cut 1% off the Chinese exports to GDP percentage, meaning that Chinese
GDP growth is damaged by at least 1% with the loss of exports, according to the report. But simple regression analysis for the period 1980-2006, suggests a 1% rise in U.S. GDP adds 0.58% to Chinese GDP. Assuming Chinese GDP would grow at 9.6% in a world where U.S. GDP grows 3.0%, a U.S. GDP growth of -1% would knock 2.3% off the Chinese growth rate.
"This is less than one might have imagined!" Murenbeeld said. "My inclination is to suggest that Chinese exports and Chinese GDP dance to their own drummer more than to the U.S. drummer."
In other words, demand for commodities in China will not wither away in the event of a U.S. recession.
Conclusion
Regardless of whether a U.S. recession will negatively impact China's growth, and in turn, demand for base metals, analysts agree the dollar is falling and gold is rising.
Van Eeden said gold is still "on its way to $900 and $1000." Turk predicted gold will hit $850 early next year.
Gold for December delivery closed up $11.60 at $640.60 an ounce today after hitting a high of $641.60 on Nymex.