There’s no denying China’s massive economic growth over the past decade, as the country recorded an average GDP of more than 10% per year. In only seven years, China’s economy doubled; in 13 years, it tripled.

With this incredible expansion, China began to import commodities at an incredible pace. In 2000, the country imported only 70 million tons of iron ore; today, it’s more than 10 times that amount, at 763 million tons. Copper imports increased dramatically too, growing from 1.6 million tons in 2000 to more than 4 million tons per year today, according to BCA Research data.

And when it comes to oil demand, 17 years ago, China was a net exporter. Today, it is the second-largest importer, transporting 5.4 million barrels of oil into the country every day.

That’s why it is widely accepted that the Asian giant spurred higher commodity prices in the past decade.

And if the country was the force behind the boom, then the assumption is that China’s lower, but still healthy growth will be a drag on commodity prices.

But recent research challenges this assumption.

According to BCA Research’s Chen Zhao, what is initially an “outrageous proposition” may not actually be. The analyst says the fact that China’s consumption of industrial commodities significantly increased at the same time prices rose may have only created “the impression that China was the main driving force behind the commodities boom.”

Consider that since the substantial growth early in the last decade, China has continued to import commodities at a remarkable pace. Since 2007, the Asian giant buys 2 times more iron ore, 1.5 times more copper and 6 times more coal from other countries.

“The level of Chinese commodity imports obviously reflects the size of its economy,” says BCA. So even if the growth rate has slowed down, “the absolute level of Chinese commodity demand continues to set new records every year.”

…..read page 2 HERE

CRUDE:

Crude Oil bottomed (weekly data) about 12/25/1998 at $10.75.  It rose erratically for several years, hit another low on 8/24/2007 at $68.70, and then rallied dramatically to an all-time high of $147.20 on 7/11/2008.  Subsequently, crude collapsed to $35.35 on 12/26/2008.

SILVER:

Silver bottomed (weekly data) about 11/23/2001 at $4.01.  It rose erratically for several years, hit another low on 2/5/10 at $14.78, and then rallied dramatically to a nearly all-time high of $48.58 on 4/29/2011.  Subsequently, silver collapsed to $18.53 on 6/28/2013.

SO  WHAT?

Both crude and silver took about 9.5 years to rally from a significant low to an important high.  The high to low ratios were similar – over 13 and over 12.  Both collapsed after their blow-off highs and fell 76% and 62% from their highs.  Crude rallied during the next four years and is now over triple its crash low.  Silver, a much smaller and more volatile market, seems likely to do something even more dramatic.

Questions:

Assume market prices for crude oil are based on supply and demand of physical crude oil.  Do you think supply and demand for physical crude oil changed sufficiently between the crude low in August of 2007 to the high in July 2008 to the low in December 2008 to justify a rise from $68.70 to $147.20 and then a fall to $35.35?

• Answer one:  Obviously it did; the market price changed and the market price is always correct.
• Answer two:  Perhaps politics, High Frequency Trading (HFT), and derivatives also affected the supply and demand of paper contracts for crude such that the price of crude more than doubled and then collapsed by 76% in about 1.3 years.
• You choose the best answer.

Assume market prices for silver are based on supply and demand.  Do you think supply and demand for physical silver metal changed sufficiently between the silver low in February 2010 to the high in August 2011 to the low in June 2013 to justify a rise from $14.78 to $48.55 and then a fall to $18.53?

• Answer one:  Obviously it did; the market price changed and the market price is always correct.
• Answer two:  Perhaps politics, High Frequency Trading, and derivatives also affected the supply and demand of paper contracts for silver such that the price of silver more than tripled and then collapsed by 62% in about 3.4 years.
• You choose the best answer.

WHY DISCUSS THIS PARALLEL?

Sentiment for silver and gold was (June 2013) exceptionally low – at multi-year or multi-decade lows depending on who is measuring sentiment.  As of the end of June 2013 there seemed to be “no light at the end of the tunnel” for silver bulls and there was no joy in “silver-ville.”  Most people I know wanted nothing to do with silver or gold.

It was about the same with the crash low in crude 4.5 years ago in December of 2008 and the S&P500 crash low in early 2009.  But the world economies demanded crude oil while the supply was flat or declining.  Consequently the price rallied back to over $105 this month – about triple its collapse low price.

I think it is quite reasonable to expect that silver will also rally substantially from here.  In fact an explosive rally would not be surprising.  What seems likely is a multi-year rally (that culminates in another price blow-off) to four or six (or ten) times the low price in June, the inevitable price collapse, and then some months or years in a trading range at prices that make sub-$20 silver look like an absolute bargain.  I suppose that if the US congress balances the budget AND world peace is confirmed, then silver prices are unlikely to rally… but I would rather bet on higher silver prices.

How are crude oil and silver similar?

Both had a nine plus year rally to a blow-off peak, collapsed, and rose again.  Crude began its rally about three years before silver, and peaked about three years earlier.  Both are essential for modern economies and their prices on the paper exchanges are heavily influenced by politics, HFT, and derivatives.  The supply of crude is probably declining and the supply of silver is growing quite slowly.  The world-wide demand for crude is likely to increase, even with slowly growing economies.  The world-wide demand for silver is likely (my opinion) to dramatically increase due to increasing industrial demand and potentially explosive investor demand.  There is good reason and good historical precedent to expect the price for both commodities to increase substantially, with great volatility.

Do you remember when crude was priced under $5.00 per barrel and silver was priced under $2.00?  Given the penchant for governments around the world to run huge deficits, amass unpayable debt, and increase themoney supply (monetize bonds) in seemingly unlimited quantities, do you think either $250 crude or $100 silver is unlikely in the next several years?

Neither do I!

We will see $250 crude, $10 gasoline, and $100 silver, unless the world’s economies and governments become responsible and accountable.

Have you purchased your Silver Eagles today?

Read:         Silver – Keep It Simple
Read:         Gains In Silver Will Be Historic

GE Christenson  |  The Deviant Investor