Supply and Demand: If China Wants It, You Should Buy It

I was watching CNBC yesterday morning waiting for the Trade report to be released. At exactly 8:30am, Becky Quick went to Rick Santelli at the Chicago Board of Trade for the report. “For December the trade deficit increased $61.2 billion exceeding expectations of $59.7 billion. November was revised down from $58.2 billion to $58.1 billion. Back to you Becky,” reported Rick. I am sure at direction of the producers - Becky quickly moved on to the next story.

That was it. No reaction from the trading pits. No economist droning on and on. Why not show the traders jumping up and down? Why no droning? Simple – the story wasn’t U.S. Stock Market positive. Even worse it was U.S. Dollar bearish. They should have had a webcam on me to capture my big smile. I was smiling, because I knew this report would create a positive back drop for gold to follow-through on last week’s move through $670/oz.

Of course, our CNBC crew knew this as well. However, to applaud Gold is to celebrate inflation or a weak dollar. One day the masses will wake up and realize that - although Gold thrives in those environments supply and demand trumps all. Take a gander at a recent quote from Don Coxe, Chairman and Chief Strategist of Harris Investment Management,

“And the reason comes down to simply this: the kind of observations we had in traveling through rural India and seeing these peasants and the women carried their wealth on their arms, their dowry. And as more and more of them become wealthy, India, which is already the largest gold consumer, and China which is moving into number two, what you’re going to have is putting their wealth in a way they can understand.”

Just like any other market – supply and demand rules the day.

As I had anticipated, Gold and Gold Mining Stocks had a great day as the Philadelphia Gold and Silver Mining Index (XAU) closed up 1.8%. However, that paled in comparison to the action in the base metals stocks.

The East is becoming wealthier, because it is experiencing the greatest industrialization in the history of the world. It is generating such demand for resources such as copper, aluminum and iron ore that it is outstripping supply. Due to the long cycle to explore, mine and produce these minerals, the producers are buying reserves through acquisitions. Yesterday, there were reports that mining giants Rio Tinto and BHP Billiton are preparing bids to acquire aluminum producer Alcoa (AA). This is simply another acquisition in the feeding frenzy that has taken place over the last few years.

Here’s how some companies in the sector responded:

Companhia Vale Do Rio Doce (RIO) +6.1%

Southern Copper (PCU) +6.1%

Teck Cominco (TCK) +5.5%

Freeport-McMoran (FCX) +5.5%

Alcan (AL) +4.9%

Lundin Mining (LMC) +4.3%

Rio Tinto (RTP) +3.1%

BHP Billiton (BHP) +2.3%

Phelps Dodge (PD) +1.8%

There were many other exceptional performers, but those are the ones in my Big-Build Out basket of stocks - designed to capture this trend.

Sectors such as environmental clean-up, agricultural products, international transportation and obviously energy are benefiting from the industrialization as well.

Buying stocks in companies that provide products and services needed by the emerging countries appears to an excellent way to outperform the market.

Disclosure: Author holds a long position in some of the above-mentioned securities.