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July 28, 2006

Mega World Power Shift
by Mary Anne and Pamela Aden

Something big has been happening in the world in recent decades. This isn't something you'll hear about in the news because it's not just one event. It's a series of events that are happening gradually and sporadically, but early signs point to a mega world power shift, which could end up being as important as the Industrial Revolution, increasingly affecting us all, in one way or another in the years ahead.

CHANGING GLOBAL BIG PICTURE

As we see it, this is the global big picture and it's coinciding with the big pictures in various markets. It involves China's growing power, the fall of communism, globalization, independence, the internet, emerging nations, lower poverty levels, debts for some and surpluses for others, a wealth shift, nationalization, geopolitical changes, the formation of new international strategic alliances, terrorism, holy war, the spread of Islam and the loss of U.S. dominance. These are some of the most important factors that have been, and are taking place, and they're changing the world.

As you know, major global shifts have happened throughout history. In recent centuries, there was the rise of Europe as it evolved into the world's wealth center. This was followed by the rise of the U.S., which became the most powerful nation on earth. Now we're seeing the economic rise of Asia, especially China.

Basically, nothing ever stays the same, but it's sometimes hard to see the forest for the trees when it's actually happening. But if this global mega shift continues as we believe, then it's going to mean upsets for some and benefits for others. So it's good to recognize this, be prepared, watch it and get positioned so you won't be out of step, both personally and investment wise.

CHINA: The growing giant

What's happened in recent decades is truly amazing and it's history in the making. By opening up their economy, China has become the fastest growing world economy on a scale never seen before. They've become the world's largest manufacturer, their exports continue to soar and they've lifted 250 million people out of poverty, reducing their poverty level from 61% to 17%. There are now hundreds of thousands of millionaires in China and everyone is a big saver. So it's not surprising that China has built up the biggest cash reserves in the world.

They're also making friends internationally and looking out for their future interests. In the past couple of years, China has made deals worth billions for oil and natural resources with Canada, Iran and Nigeria, three of the world's top oil producers, as well as with Russia and India. In Africa alone, China is involved in about 900 investment projects.

Russia is doing the same and so are many other growing and emerging countries. Russia, for instance, is also doing big business with Iran. China, Russia and Iran have made deals with Venezuela, and the list goes on.

Essentially, more countries are exerting their independence and forming strategic alliances among themselves. Globalization has brought countries closer together, internet has brought people closer together, the world has become smaller and former communists recognize the advantage of free markets.

The bottom line is that 3 billion people are now participating in the global economy who weren't involved before. In fact, it's unprecedented that nearly the whole world is participating in economic growth, which represents a lot of new demand. But increasingly, a growing number of countries are also doing their own thing, and they're doing it without the U.S. As former U.S. National Security Advisor Brzezinski warned, this geopolitical alienation from the U.S. could become a lasting and menacing reality.

U.S. SLOWLY LOSING GROUND

Why is this? As the world sees it, they're generally opposed to U.S. policy. Even old friends are having doubts with the latest examples being Italy, Japan and Romania who announced they're leaving Iraq, following others who've already left. As time passes, the U.S. is unfortunately being viewed in a negative light and the latest PEW Research poll reinforces this.

People in 13 out of 15 countries polled considered the war in Iraq more dangerous to world peace than Iran's nuclear intentions... and these are countries in Europe, Asia and Africa. While opinions are favorable for the American people, the numbers are in sharp contrast for the administration, citing the huge U.S. military build up, isolation on the environment, disrespect for human rights, the U.S. rejection of the world court and their general attitude.

In addition, the world sees the U.S. spending like mad, it's by far the world's biggest military spender and it's sinking ever deeper into debt. It doesn't help that S&P said the U.S.'s AAA credit rating could be hurt by the budget, and without fiscal reforms the U.S. rating would fall to A or BBB in the decade ahead. So taken together, the world basically feels the U.S. has no business telling others what they should do. Again, this is unfortunate but it's happening and as the U.S. slowly loses its dominance, it has emboldened others.

GROWING NATIONALISM

Venezuela, for example, has led the call for nationalization and others are following. Bolivia seized facilities of foreign gas and oil producers using military force, it has expropriated one fifth of the country's land, and warned of changes in mining and other sectors. Russia is getting tougher on its foreign oil and gas companies, and we're starting to see this in the Middle East too.

Meanwhile, Iran is dragging its heels. When Bush threatened sanctions if Iran doesn't accept the compromise nuclear program plan, Iran defiantly said they'll have to wait two months for a reply.

On the war front in Iraq, the insurgency keeps growing and it's becoming more violent. Bin Laden says the holy war will continue and it's attracting fighters from throughout the Muslim world. With world approval and U.S. enthusiasm for the war in Iraq diminishing, confidence within the insurgency is also growing and some feel the U.S. may end up going the way the Soviets did in Afghanistan.

Last year, however, Rumsfeld said the U.S. could stay in Iraq for 12 more years. Whatever the outcome, as the war continues and Islam keeps spreading into Africa, Asia and Europe, the more than one billion Muslim population will continue growing and the threat of more terrorism and war will likely grow with it as we're now seeing in Lebanon.

FOCUS ON THE BIG PICTURE...

At this point, we obviously don't know how these factors and shifts are going to turn out in the years ahead, but we can make some assumptions... First, we'd put China's growing power at the top of the list. If the U.S., for instance, keeps draining its resources, which is nearly certain as long as the war continues, and China keeps growing as most expect, China's rise is poised to stay on course. Its cash reserves will become even larger, which will result in even more economic power than it already has.

As it now stands, decisions in China have been driving commodity and oil prices higher and this will likely continue in tandem with Chinese growth. That means we'll continue to see inflation and higher prices in gold and the other metals. That's especially true combined with changing weather patterns, which could become more severe as China, India and other nations grow due to increased gas emissions, resulting in more flooding, droughts and so on, as we've recently seen in the U.S. and other countries, and that'll also boost commodity prices.

Few realize that due to the huge amount of dollars China is currently holding, China probably has as much, if not more power over the U.S. economy than the Fed does. If it decided it didn't want U.S. Treasurys, for example, it would drive the dollar sharply lower, interest rates would have to move much higher to attract investors, which in turn would hurt bonds, the stock market, housing prices and the economy due to reduced profits and a slowdown in consumer spending. And while this may seem far fetched, it's really not. The markets are telling us that these major market trends will likely remain in force in the years ahead.

... AND THE MAJOR TRENDS

Plus, top ranking Chinese bank officials are starting to speak out. Interestingly, a deputy governor of the People's Bank recently said that countries around the world should gradually rely less on the dollar for trade and foreign exchange. A Chinese central bank advisor also made the formal recommendation that China should start diversifying its nearly $1 trillion in foreign currency reserves into gold and oil to hedge against a drop in the dollar.

Since China holds about 70% of its reserves in dollars and only 1% in gold, that would make sense. But the Chinese would likely do this gradually to avoid severe market moves. If for no other reason, they wouldn't want to see their investment funds drop dramatically in value.

Nevertheless, if even a small portion of these dollars move into gold, it'll be very bullish for gold. That is, it would be one more of the many factors we discussed last month keeping upward pressure on gold and downward pressure on the dollar in the upcoming years.

The point is, gold is in a mega bull market and it's headed higher. That's the big picture and it's happening to coincide with this mega world power shift. In recent months, gold has been volatile but that's insignificant compared to the big picture. So if this has you concerned, keep in mind that corrections and volatility are normal within any major uptrend and for now, we have to be patient. But considering what's happening globally, we may not have to be patient for long.

Mary Anne and Pamela Aden
Aden Forecast.com

Mary Anne and Pamela Aden are internationally known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts on gold, gold shares and the other major markets.

Copyright © 2003-2008 Mary Anne & Pamela Aden

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