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China Opens the Flood Gates for Gold and Silver

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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."

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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.

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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.

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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!

 

9 Comments – Post Your Own

#1) On August 06, 2010 at 12:35 AM, silverminer (31.40) wrote:

The above article has been posted at GATA here:

http://gata.org/node/8895

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#2) On August 06, 2010 at 9:07 AM, outoffocus (22.89) wrote:

I see gold has jumped back over $1200 this morning.

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#3) On August 06, 2010 at 9:24 AM, catoismymotor (32.76) wrote:

Silver too has spiked a little. But is down a in the past hour. Very interesting.

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#4) On August 06, 2010 at 10:47 AM, silverminer (31.40) wrote:

If the market understood the implications of developments out of China this week, we'd have popped to $1,350 / $21.50 overnight.

Unfortunately, alongside the darkest opacity of any markets on the globe, gold and silver also suffer from the weakest breadth of real market insight of anything out there. For those still accumulating, of course, that is a positive feature.

This will mean billions and billions of USD reallocated into projects to supply a growing Chinese demand that remains unsated by China's status as the world's leading producer.

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#5) On August 06, 2010 at 11:27 AM, cbwang888 (25.93) wrote:

Say hello to $1200/oz.

USD holders haven't realized that the old-fashion safe haven is no longer safe. USD debt problem is no better than European ones.

US continues to have service sector expansion over manufacturing ones. We can all now move existing goods from A to B without producing anything (to the extreme).

 

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#6) On August 06, 2010 at 6:37 PM, leohaas (32.29) wrote:

"If the market understood the implications of developments out of China this week, we'd have popped to $1,350 / $21.50 overnight."

So, how come the market doesn't get it? I really want to trust you here (I have significant investments in gold and silver miners and they are going NOWHERE). Anything we can do to help the market understand this?

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#7) On August 06, 2010 at 6:39 PM, leohaas (32.29) wrote:

Or is this just part of China trying to buy commodities they don't have? No doubt that is already priced in to the market...

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#8) On August 06, 2010 at 6:58 PM, silverminer (31.40) wrote:

leohaas

China is the world's leading producer of gold. This policy statement proves that even that world-leading production is insufficient to satisfy emerging gold demand. They will sent those dreaded dollars out into the world to accelerate development of mines that will already have a known associated demand waiting for them. 

What it will take for the market to comperhend the implications of this? ... I don't know. All I can say is I wake up every single day and try my hardest to convey the fair value of these miners and the extent to which gold and silver themselves remain woefully behind the curve in terms of accurately reflecting either the enormity of the currency crisis underway or the fatally leveraged nature of the global bullion market.

I know it takes more than one Fool's article to inform a market. Thus far, mine is the only analysis of the event that ties the policy statement into the context of the massive commodity purchases / investments out of China over the past 2 years. Look what China's investments did for coal (think Teck Cominco). Look what China's investments did for oil (think Petrobras). There are dozens of examples across multiple commodities, and the impact has been enormous. You think copper would be at $3.35 today without China's "going out" policy directive? 

The impacts, furthermore, will be felt over the course of many years. A 600mt thermal coal supply agreement over 20 years will exert an impact upon coal markets over the course of that entire 20-year period. Through that sort of lens must this development be viewed.

I don't know what more to say, except that patience will be rewarded. Vindication will come to those with the patience.

Fool on!

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#9) On August 09, 2010 at 1:27 AM, scs2010 (< 20) wrote:

hi

google

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