XMFSinchiruna (28.57)

China Opens the Flood Gates for Gold and Silver

August 05, 2010 – Comments (9) | RELATED TICKERS: SA , NG , TCK

These are some of the more significant fundamental developments to hit the precious metals markets thus far this year, and the impacts from these moves will be felt for years to come.

It changes the entire investment landscape for gold, and needs to be understood in the context of China's broader hard asset buying spree over the past several years.

The bold, anti-USD rhetoric from two officials at a government-sponsored financial think tank represents a significant deterioration of the diplomacy and polity present in much of the prior discourse on currencies over recent months.

I think these developments are linked, and their simultaneous timing is no mere coincidence.

China is letting the cat out of the bag with respect to its intention to diversify reserve into gold to the greatest extent possible under the supply scenario mapped out by this recent financial policy directive.

China Opens the Flood Gates for Gold and Silver

http://www.fool.com/investing/international/2010/08/05/china-opens-the-flood-gates-for-gold-and-silver.aspx

Excerpts:

Yu Yongding, a member of the government-sponsored Chinese Academy of Social Sciences (and a former advisor to China's central bank), delivered a poignant vote of no confidence this week in the safety of U.S. Treasuries. Dissenting from the prevailing bond market sentiment -- which sees investors still buying U.S. bonds in droves despite historically low yields -- Yu warns: "I do not think U.S. Treasuries are safe in the medium and long run."

.....

The same Chinese Academy of Social Sciences' deputy chief of international finance research, Zhang Ming, warned separately this week that: "The U.S. government has strong incentives to reduce its real burden of debt through inflation and dollar devaluation. Whichever way it is, the yuan-recorded market value of Treasuries will fall, causing huge capital losses to China's central bank." If the dollar's declining purchasing power is now an inevitable fate, as these Chinese officials seem to suggest in their blunt remarks, then perhaps we really are fast approaching a terminal saturation of China's appetite for U.S. debt. If that were true, we might expect to see some corresponding rumblings within China's official stance toward gold.

.....

Here, world, have your dollars back
In a landmark development for the precious metal market, China's central bank threw a lifeline to a credit-strapped global mining industry this week by explicitly directing banks to extend credit: both directly to producers of bullion (presumably gold and silver), and to Chinese entities seeking overseas acquisitions in the sector. The bank "will place heavy emphasis on supporting large-scale gold producers in their development and overseas expansion plans."

After carefully tracking China's momentous activities investing in resources and related projects around the globe in recent years, I look forward to following this overlooked acquisitive trend as it flows directly into the markets for gold and silver.

.....

Financing outside the box
If China's actions in the energy and commodity markets provide any indication, Fools may be wise to consider the likelihood that China's upcoming involvement in the precious metals sector will take a variety of forms beyond mere acquisition or investment stakes in miners.

For a prime example, consider the meaningful precedent provided by China's $10 billion capital infusion into Brazilian energy star Petroleo Brasileiro (NYSE: PBR) in exchange for supply agreements for 200,000 barrels of oil per day through 2019. Similarly, China Power International Development inked a massive $60 billion supply agreement with Australian developer Clive Palmer that secured an astonishing 600 million tonnes of coal supply for China over a 20-year period.

Borrowing a page out of silver stream specialist Silver Wheaton's (NYSE: SLW) unique business model, some of China's forthcoming activity in precious metals may indeed be geared toward securing a steady supply of imported bullion in exchange for up-front development capital. Whatever combination of direct investment stakes, supply agreements, or low-cost development loans result from this official policy directive, I believe that the impact will be broadly and powerfully felt throughout the global markets for gold and silver.

Thanks so much for sharing your views below on these groundbreaking developments in the precious metal markets. If you appreciate the analysis, please be sure to rec the original article at this link, and share it with anyone you think might be interested.

Fool on!