The Secret to Investing in China

Bob Irish Reporting: Delray Beach, FL.

All Eyes Should Be on Texas

The big gold news yesterday was India’s $6.7 billion purchase from the IMF. But it’s a much smaller number – $250 million – that’s making waves.

India’s gold purchase was no big deal. We’ve known for a while that central banks are buying more gold than usual.

But what a pension fund from Texas is doing with $250 million of its money is new. The Teacher Retirement System of Texas decided to create its own gold fund. And it’s stocking that fund with precious metals, mining stocks, and exchange-traded funds (ETFs).

Teacher Retirement’s management simply wanted some protection for its $95 billion in assets. They realized that last year’s near-collapse of the financial system could have put the fund into bankruptcy. (It didn’t only because the government intervened.)

Back to the Future

Gold and other precious metals used to be a standard part of every investment portfolio. IDE’s Rusty McDougal reminds us that a mere 25 or 30 years ago, professionals recommended that every investor should have 5-15% of their money in precious metals.

When the dollar was taken off the gold standard, gold lost its popularity. Now funds and individuals are beginning to rediscover gold.

Shayne McGuire of the Teachers Retirement System says, “I think the largest institutions like our own are realizing that we barely own any. The same thing applies to most of the pension funds which manage trillions of dollars in world wealth.”

As pension funds increase their gold holdings, they will push prices higher.

Gold’s Comeback Is Just Beginning

Gold’s comeback is just beginning. Banks, funds, insurance companies, governments, and individuals all over the world hold $200 trillion worth of financial assets. Less than half-a-percent of that is in gold. For investors to increase that to just 1%, they would have to buy $800 billion worth more.

Rusty says, “Gold is still a vastly underused investment with a long way to go.”

Three Steps and You’re Golden

Guess what? You need financial insurance as much as the pension funds do. And you can get it through gold just like they’re doing. It’s not hard to create your own gold fund. Here’s how to get started ...

1. Set aside 15% of your net worth for your gold fund, and put 10% in physical gold to hold long term. This is not an investment. It is the bedrock of your savings.

2. Put another 4% in global companies that mine for gold, as well as the ETFs that track gold or gold mining companies.

3. Put your final 1% into small gold-exploration companies.

Why only 1% into the small exploration companies? This is the most speculative part of your gold fund. You can make a great deal of money with these companies, but it’s tough to single out the ones that will be successful at such an early stage.

China’s Ghost Malls

Around 500 new malls have been built in China over the last five years. You’d think with a population of 1.3 billion these malls would be teeming with people. Think again.

Many are still waiting for the crowds of shoppers to arrive.

For example, the New South China Mall opened in 2005 and is 99% empty. Fewer than a dozen stores are open in its 9.6 million square feet of floor space.

The U.S. isn’t the only country where questionable lending and borrowing has led to disaster...which is all the more reason to be careful when investing in China. But one fund has come up with a stunningly successful formula...

The Secret Behind the World’s Most Successful China Fund

The most successful China fund in the world has beaten 99% of its peers over the past five years. Its strategy is not investing in Chinese companies. Whoa! Say again?

Only half the fund is invested in Chinese stocks. The other half is invested in multinational companies that get at least a third of their profits from selling to China. This has allowed the fund to benefit from the Chinese boom while minimizing the country risk. You can employ a similar strategy.

Invest Safely,
Bob Irish
Investment Director

China Govt's Secret New Gold investment could pay 500% over next 2 Years

What Chinese Authorities Do Not Want You to See

By Tom Dyson

If the Chinese authorities had caught him making this video, they would have arrested him...

Hugh Hendry is a hedge-fund manager from Britain. Eclectica is the name of his fund. He's outspoken and critical of the establishment. You could say he's somewhat of a pariah in London's hedge-fund industry. In 2008, his fund generated 32% by making massive bearish bets...

Earlier this year, Hendry took a trip to Guangzhou, China's third-largest city after Beijing and Shanghai. There's been a huge construction boom in China in recent years, and Guangzhou is one of the hot spots. Developers have erected so many skyscrapers, Guangzhou's central business district could easily match Chicago or Boston for the number of modern, high-rise buildings.

So Hendry shot a video of the office buildings in the district. He focuses on one shiny black skyscraper with a giant neon screen at its base. It's close to 100 stories... And it's obviously brand new...

"This is a seriously large building," says Hendry. "We're talking at least half a billion dollars to construct this thing. It's empty! Who is going to fill this thing? Who is going to pay the debt that that building is resting on?"

Hendry's film shows several more skyscrapers... each as large and modern as any new tower you'd find in Manhattan... and they are all completely empty.

"This is astonishing," he concludes... You can watch the whole video here.



Thing is, the Chinese are incredibly touchy about foreign journalism. I experienced it first hand when I was in China last year and tried to organize a tour of a factory in Lanzhou. They almost arrested me when they discovered I didn't have a journalist visa. If the Chinese had known Hendry was filming empty buildings and posting his movie on the web, they would have definitely arrested him...

So why does Guangzhou have so many empty office buildings? It's because of false market signals. The Chinese government's inflation and easy-money policies have led developers to build more office space than Guangzhou needs.

Now that the world economy has fallen apart, the malinvestment sticks out like an empty skyscraper.

From the reports I've heard, it's not just Guangzhou. There are now too many factories, too many buildings, and too much infrastructure relative to demand all over China...

Instead of letting the market liquidate these mistakes when the crisis struck, the Chinese government decided to make it even worse. Over the last nine months, it has forced banks to make more terrible loans and encouraged a new batch of unnecessary construction. A second China bubble has formed. You can see this second bubble in this chart of Shanghai's stock market index. It rose over 100% between November 2008 and July 2009.



But that bubble may be about to end... Three weeks ago, the Shanghai stock market reached a peak and started falling. Now we have the downtrend. We have a fantastic opportunity to short this bubble and make a fortune as the new Chinese miracle falls apart...

There are a lot of ways to go about shorting China. You can sell short commodities like copper and oil. Chinese stocks and commodities tend to trade along with each other. You can also short the big Chinese stock ETF (FXI) or buy an "inverse fund" that profits when Chinese stocks fall. The symbol here is FXP.

Good investing,
Tom