Thursday, August 5, 2010

Beware the Dragon's gold teeth---By Shan Saeed

China is putting itself in a position where dominance of the gold market, of which it is capable, could lead to it exerting global financial hegemony.

In April 2009, China bought 16 million ounces of Gold. There was a report from China that state-controlled organizations - as virtually all entities are in China - had launched marketing efforts at persuading its citizens to buy gold and silver as an investment. Not surprisingly with such an article, which we have been assured by our Chinese contacts is correct, there have been those who have accused us of falling prey to pure promotional hype from the gold lobby and there has been no such programme. But the facts belie the doubters with Chinese gold purchases by investors rocketing last year and this year as well.

The World Gold Council had entered an agreement with China's, and the world's, largest bank the Industrial & Commercial Bank of China (ICBC) (state-owned of course) to co-operate to promote gold investments in China.

China is further loosening its controls on the import and export of gold on the one hand, and on the other that it is also going to support Chinese company investment in overseas gold mining projects.

Does anyone notice a pattern emerging here?

China in particular, will effectively put a floor under the gold price - and that floor seems to be rising continuously as seen in the gold price's stair step advances in recent months. A senior Chinese official has stated publicly that the country will buy gold on the dips so as not to disrupt the market and undermine the US dollar - and there is perhaps more than anecdotal evidence that the Chinese government is buying gold, effectively surreptitiously, for its reserves, but not disclosing this until it reckons it is opportune so to do. Last time it announced an increase in gold reserves it had in fact been accumulating the yellow metal for 6 years before it actually made the fact public.

But why should China hold back dissemination of this information? The Chinese know that an announcement that shows it has accumulated a further large gold holding will move the gold price sharply upwards. (Another reason why China has not bought any of the IMF gold.) A resultant gold price leap could well be seen globally as a devaluation of the dollar, leading to yet another nail in the greenback's coffin, and given the dollar-related element in China's huge currency reserve surplus, that could be seen as not being in China's best interest - at least for now.

There has also been considerable evidence that Chinese companies (all state-controlled) have been buying up western investments - in the resource sector in particular - at a phenomenal, and seemingly ever-growing, rate. Some would say this is an attempt to convert some of the nation's huge dollar currency surplus into hard assets, while at the same time helping secure future supply lines for the global industrial giant. Some of China's top economists have gone on record as saying that they have little confidence in the long term future of the dollar as the only real reserve currency, and replacing some of its dollar reserves in this manner is probably - certainly - government policy.

But what this does mean to the West in general, and to the U.S.A. in particular, is don't screw with the Dragon. It has golden teeth which can really cause financial damage to the status quo if it should so wish, and it is also gaining a position where it can dominate the supply of many militarily strategic metals and minerals, not just gold, should any other country try and resort to gunboat diplomacy! The time is perhaps not ripe - yet, but every move that China makes in the resource sector in general, and in gold and in some particularly strategic metals and minerals (think rare earths) could be interpreted as a long term plan to make China top dog in the global economy and, at the same time, make it secure from any nation which might want to try to prevent it reaching this position of global dominance by any means.

But in the meantime it is set on keeping its own 1.4 billion population happy - and subservient. The best way of doing this is by continuing internal growth, which in turn is needed to generate the demand to fuel its industrial engine. 8% GDP growth is a bad year for China. What would most of the West's industrialised nations give for a growth rate of half that today? Within this policy, persuading its new, and rapidly growing, middle classes to invest in gold, and then ensure the metal continues to rise gradually in price, thus maintain wealth aspirations, is one way of keeping a potentially troublesome element of society more than happy.

Now maybe I'm being too cynical in my analysis, but history also suggests that some nations are prepared to look very long term in their approach to global business and politics, and ultimate dominance in both - and the Chinese seem to fit this pattern well. On the other hand a capitalist democracy is less well suited to extended planning of this type as fortunes of political parties wax and wane and agendas are constantly shifting. The world order is changing. The U.S. cannot exert its current global financial control for ever.

Copper Gold Ratio Predicts Higher Stock Prices

Since we’ve had movement in both the price of copper (up) and gold (down) I thought we’d check into the copper/gold ratio. The reason I’m interested in the price of copper in gold is that it has been an uncanny predictor of the S&P 500 recently:

copper gold ratio Aug 2010

The copper gold ratio was predicting lower prices for the S&P 500 index back in June.

Back then, the ratio fell below the lows it made in October 2009, November 2009 and February 2010. Soon stock prices followed.

Now, the ratio has made a bottom (in early June) and surpassed its previous lows (blue line). That would suggest that the early July lows in the S&P 500 will hold - assuming that this relationship between the commodities ratio and stock prices continues, of course.

1 comment:

  1. One has to admit that when it comes to recession nothing better than the power of resources helps the country fight with in the world's economic battlefied, or for that matter any battlefield. China knows this but so does every other country; the difference- while the US struggles with bailout plans China already has support for its industries. Which is why Chinese market shares do not fall as drastically as the western hemisphere; having a higher frequency of industrial bankruptancy.