Silver is an appealing way to benefit from growth in China. Due to the concerns about corporate governance in China, a cottage industry has developed for research firms that ferret out fraud in publicly traded Chinese companies, establish a short position, and then release reports detailing the reasons for the action. What these firms such as Glaucus Research and Muddy Waters do is legal, highly profitable in many cases, and provides an invaluable service to investors and the global financial community, as the less fraud in financial markets, the better. An appealing way to deal with this issue yet still gain from growth in China is in commodity positions that will move higher along with demand from the People’s Republic.

This is due to when these reports are released or related events take place like the recent Securities and Exchange Commission accusation that the Chinese affiliates of the “Big Four” US accounting firms were breaking the law by not producing certain documents, the share prices for Chinese firms will fall as investors fear the stocks are overvalued. There is even concern now that all Chinese stocks will be delisted due to the concerns about the reporting requirements.

Too Much Value in Chinese Stocks to Overlook

That is obviously not going to happen. As a matter of fact, the share prices of publicly traded stocks such as China Mobile (NYSE: CHL) have increased since the SEC threat. In addition, Canada just approved the takeover of Nexen by CNOOC, the Chinese oil firm. There is no profit to be made in overreacting to fraud concerns in China. There is even less gain to be realized in ignoring the world’s largest economy by purchasing power and the world’s leading trade partner. But there is much to be gained from trading the iShares Silver Trust (NYSE: SLV) to profit in Chinese economic growth.

As the chart below shows, the SLV moves in a positive correlation with the main exchange traded fund for China, the FTSE 25 (NYSE: FXI).



There are many reasons for the correlation between silver and the Chinese economy, both due to speculators and investors.

Speculators have bought commodities due to the recession in Europe, anemic economic growth in the United States, and Japan entering the 23rd year of its “Lost Decade.” The economic stimulus measures initiated by central bankers in each of these countries has weakened the currency units, in addition to highlighting weakness in the economies. As a result, with 7.9% economic growth for the most recent quarter, China becomes very attractive.

Along with China, commodities like silver become very appealing, too. Weak paper currencies naturally make silver and other commodities more attractive. Silver has an appeal over gold or copper to speculators as it goes for both industrial and non-commercial applications.

For investors, silver rises with Chinese economic growth due to the voracious demand in the People’s Republic for some many items that use it. China is the biggest market in the world for mobile phones, which require silver. This industrial demand from China leads to silver rising in price.

With its appeal to both speculators and investors, silver is an attractive way to gain exposure to China. It will never suffer when bouts of fraud occur, as has been demonstrated by its trading pattern. If anything, it should gain as it cannot be faked: the industrial demand is real, along with its role as safe haven asset. The SLV is an attractive investment vehicle for rising with economic growth in China without suffering from the misdeeds of corporate criminals.

Marcus Holland

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Silver Gold Bull