Saturday, September 5, 2009

China and Precious Metals: Fasten Your Seatbelts!

  1. Central Banks to become net buyers instead of large sellers: Stockhouse
  2. China urges citizens to buy gold and silver: Seeking Alpha
  3. Warnings Ignored: Silverseek
  4. Reasons for latest gold/silver breakout: Motley Fool:
  • In a move that Western media sources have failed to cover adequately, the agency responsible for oversight of China's state-owned enterprises (SOEs) recently warned foreign financial institutions that SOEs will be permitted to walk away unilaterally from failed OTC derivative hedge contracts.
  • China will purchase up to $50 billion in Special Drawing Rights (SDRs) from the International Monetary Fund. Fools will recall that China has explicitly called for replacing the U.S. dollar as the world's reserve currency in favor of these SDRs. Russia and India have likewise indicated an interest purchasing SDR-denominated IMF bonds.
  • China's ramped-up dealmaking activity for resource-related assets around the globe reflects an official policy directive. Recent loans or investments by Chinese entities relating to foreign resource assets are themselves nearing the $50 billion mark. China has indicated that foreign reserves will be deployed in support of this broader initiative, representing another clear diversification away from U.S. dollar exposure.
  • The Democratic Party of Japan emerged as the clear victor in last week's election, ending a 15-year reign of the Liberal Democratic Party. Fools will recall that the Democratic Party of Japan's finance chief advised his nation last May to cease purchasing U.S. Treasury bonds unless those bonds are denominated in yen.
  • China is considering a ban on rare-metal exports. More than 95% of the world's supply of rare-earth minerals comes from China, so the move places global manufacturers of everything from hybrid cars to cell phones in a difficult position. China is also the world's leading producer of gold, and this move raises this Fool's eyebrow as a precedent for China's restricting exports of key strategic resources.
  • China is actively encouraging its 1.3 billion citizens to invest in precious metals. I have viewed excerpts from state television touting the extraordinary relative value of silver to gold given the large deviation from the historical ratio between prices of the two metals. Because gold and silver are surprisingly small physical markets, even a minor uptick in investment demand could fuel sizeable price increases.
  • Hong Kong is repatriating its physical gold reserves from London to high-security vaults at home, and it is inviting the region's central banks to store their bullion there. Announced just this week, the move deals a significant blow to London's historical role as a global hub in the precious metals market, and it raises the specter of a potential price-settlement hub in Asia to rival the New York and London daily spot-price fixes. The Hong Kong Monetary Authority is also targeting a new gold bullion ETF using the new vault as a repository, which would remove yet more physical supply from the market. The SPDR Gold Shares (NYSE: GLD) reports holding 1,078 tonnes of gold, slightly more than China's last-reported gold reserve
And Jesse has some interesting things to say about Wall Street Bankers: Jesse's Cafe Americain:

"Do these people take us for imbeciles? Do they think that the world does not see their corruption, their greedy, devious nature when it is not masked by a captive media, and is not repelled by it?

In 2005 we forecast this very outcome, that Wall Street and their cronies would push their schemes beyond all reason, like drunk drivers or addicts who cannot quit, until they create a cathartic, catastrophic event which will cause someone to finally take away their keys at the last.

That time is approaching. No one can predict exactly when, but it is there. Make sure you are wearing your seat belts."

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