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Unbreakable China

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How to profit from the country's recovery.

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Will China recover? Of course. Everybody knows that. So how do you make money off of that prediction?

The hard part is picking the bottom. As a matter of fact, it's darn near impossible. The other thing that's hard, is that many of the companies traded in China are traded on the Pink Sheets.

China has a population of 1.3 billion (according to CIA.gov). Millions of Chinese peasants are coming out of the countryside everyday and moving to the big city.

Until recently, the US would buy China's cheap goods, and in exchange, sell them Treasury notes. No more. The mercantile economy that the US was running was unsustainable. Now the ports of Los Angeles -- the main entry point for China's goods -- are practically empty.

So will China recover? It pretty much has to. The only difference is that the Chinese will do more trading amongst themselves. Think of it like this: A young peasant moves from the countryside to the city and has nothing other than the clothes on his back. He gets a job in a factory and makes some money. After a while, he buys a radio, cell phone and a car. What are these goods made of? Aluminum, copper, gold (GLD), silver (SLV), platinum, oil etc. Though the bottom has fallen out of these commodities, you can bet your bottom dollar they'll be back.

All of these goods are fungible. That means that there's one price, decided upon by the exchanges in London, Chicago and New York. Every single person in the world buys oil for $44 US dollars, or copper for $1.64 a pound. It also means that every person in the world, all 6 billion of us, is competing for the exact same goods. If a person from Monaco (where there's no oil) wants to buy a barrel from Saudi Arabia (where there is oil), they pay $44. So we all compete against those 1.3 billion Chinese for these goods.

So again, how do we make money off of this?

Copper goes into everything and it's hard to mine. You have to mill tons of rock just to get a few pounds of metal. Freeport McMoRan (FCX) has 102 billion pounds of copper and 40 million ounces of gold (according to Google Finance). Copper will rise when Asia gets going again (or there's a perception it will get going again), and gold should do well when there's financial unease and central banks print money.

Hong Kong is one of the best ways to invest in China. What you get is a capitalist city, owned by China. Hong Kong conglomerates all have a few things in common: They're controlled by one wealthy family, they own tons of real estate, and they have hotels and buildings in mainland China. Some of the best companies include Jardine Matheson, Swire Pacific, Wheelock, Hutchison Whampoa, and Cheung Kong Holdings. Between these few companies, they control just about everything in Hong Kong. Hong Kong is so popular that the Chinese government limits the number of Chinese that can enter. That's a good problem for these companies.

These stocks have taken a beatdown, and it's probably still too early to buy. The iShares ETF (EWH) holds most of the companies mentioned above. It's much easier than going onto the foreign exchange or buying the Pink Sheets. Third Avenue Value (TAVFX) also holds a lot of these stocks. Unfortunately, Third Avenue held way too long and has gotten pummeled.

If you can pick the bottom, you'll make a fortune off of China. Try buying in slowly. I hate to use the term "dollar cost average," but that just might work.
Position in GLD.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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