China's Latest Hunting Trip

In February U.S. Secretary of State Hillary Clinton traveled to China to beg for investment while the top Chinese brass boarded planes as fast as possible to look for deals. I am unsure whether the Chinese were anxious to secure additional deals or they simply do not enjoy Ms. Clinton’s dinner company. Either way the point is clear that Beijing is on the move again and hunting for natural resources. The great credit contraction has brought commodity prices to record lows and now is a prudent time to secure them.

Chinese President Hu Jintao has been touring Africa with a stop in Saudi Arabia. Vice President Xi Jinping and Vice Premier Hui Liangyu got to siesta in Latin America while Premier Wen Jao Bao engaged in a ‘Trip of Confidence’ to Europe with a fruitful visit with the Russians. While most of the deals in this round of jet-setting involved oil, for years the Chinese have been busy securing gold, silver, potash, natural gas and other commodities.

CHINESE DEALS

The February Chinese jet-setting and dealmaking trip yielded about $40B in loans. Chavez of Venezuela secured about $6B through PDVSA which is to be repaid in crude oil. Brazil accepted about $10B and in return guaranteed China up to 100,000-160,000 barrels per day at market prices. The oil will flow from Petrobras (PBR) to China National Petroleum Corp and Sinopec. China’s neighbors, the Russians, accepted about $25B through Rosneft (RNGZY.PK) and Transneft (TRNFF.PK) and will guarantee over the next 20 years about 15 million tons of crude oil. This is in significant contrast to the meager Chinese investment of $500M in Rosneft’s IPO where British Petroleum (BP) took a full billion and Petronas of Malysia, $1.1B.

GEOPOLITICS

The geo-political implications of securing these natural resources are extremely important. While China continues completing voluntary deals for natural resources, the Western economies flounder in disarray and chaos while attempting to bomb natural resources their way.

As Vladimir Putin said, “I was in Beijing at the time [Georgia invasion of South Ossetia in 2008]. I looked through the world electronic media. Complete silence. As if absolutely nothing is going on. It was as if somebody ordered everyone to keep their mouth shut. To those who organized all this; I can only say congratulations. Congratulations. You did an excellent job. The only problem: your results were poor and this will always be the case because the work you do is unfair and immoral. In the long run immoral policies always lose.”

For example, approximately 120,000 in Ireland were protesting the bailout of lying and thieving bankers. While there has been civil unrest in China they have the resources to spend because of their productivity and savings over the past few decades. While the Chinese economy will need to continue advancing at least it is headed that way and have the resources to pay for the Chinese stimulus plan.

The great credit contraction will continue to grind on for years and perhaps decades. When a sound monetary and banking system, like the private GoldMoney or a public currency like a gold ruble or silver yuan, gains traction it will be Asia and particularly China that will be well positioned. After all, it was China’s silver standard that insulated them against the Great Depression. On the other hand, the Western economies are atrophying and wasting their resources by reallocating them from the productive to the unproductive. The Greater Depression has arrived and China is already preparing to rise as a phoenix from the global economic ashes.

Disclosures: Long physical gold and silver. No position in the other mentioned companies.

Comments

[Ferdinand E...:]

The Chinese have more than money to spend for resources. They understand what it takes to win. Chairman Mao was not one of my favorite people, but how is this for advice: WAR IS TEN PERCENT WAITING, TEN PERCENT FIGHTING, AND EIGHTY PERCENT SELF IMPROVEMENT. He gave us a demonstration of this in Korea.

Feb 24 09:50 AM

[ROLEXDAYTONA:]

Chinese are known as a nation of gamblers, that's why their markets crashed so much, same will be with gold, they bought it as a casino chip to gamble, not as investment, when chips will be taken out the gold will crash strong.
I am short.

Feb 24 10:47 AM

[Mad Hedge F...:]

My old friend, Stephen Roche, chairman of Morgan Stanley Asia, says that the current US bubble is four times larger than Japan’s, whose market is still down 80% from its 1989 high (no typos here). The American consumer, who at the peak accounted for 72% of GDP, has been left for dead. Japan’s bubble was caused by a collapse in capital spending, which never accounted for more than 17% of GDP. If we make China our whipping boy, as the Democratic Congress is historically inclined to do, they could come back to bite us in the hand. Treasury Secretary Geithner’s recent comment that China is a “currency manipulator” hasn’t helped. Our financial markets are now desperately dependent on the Middle Kingdom recycling their trade surplus into our bond market. A Chinese boycott would trigger a collapse in the dollar, and send US interest rates sky high.

Feb 24 10:56 AM

[Conan the B...:]

Mad: say china does does bite us in the "Hand" and the USD collapses, What Sort of Financial HIT will they take on their USD reserves, 25-35-40%?

$500 Billion, a Trillion what?

Feb 24 11:59 AM

[fran:]

the question is not who gets hurt in each round of the struggle, but who has stamina and will to survive the full contest. see f. banks comment above.


On Feb 24 11:59 AM paultaut wrote:

> Mad: say china does does bite us in the "Hand" and the USD collapses,
> What Sort of Financial HIT will they take on their USD reserves,
> 25-35-40%?
>
> $500 Billion, a Trillion what?

Feb 24 12:24 PM

[daveddawg:]

The Chinese are spending their reserves today, as Trace points out. They get rid of dollars to someone who wants them, for something they want. Spreading it around the world is very wise, so as to not concentrate the dollars (i.e flood the market). They will not be so dumb to crash the dollar, but I will be suprised if they buy many more.


On Feb 24 11:59 AM paultaut wrote:

> Mad: say china does does bite us in the "Hand" and the USD collapses,
> What Sort of Financial HIT will they take on their USD reserves,
> 25-35-40%?
>
> $500 Billion, a Trillion what?

Feb 24 12:42 PM

[Conan the B...:]

fran: I read what the Professor had to say, or better yet, I read what someone else had to say.

Chairman Mao.

This man was responsible for the deaths of tens of millions of Chinese; He presented himself as being against landowners, business men and Western and American Imperialism; While still recognized as a National hero, Shanghai eliminated him from High School history books in 2006.

Present China has probably caused Mao Tse-Tung to roll over in his grave.

The Real question is whether you are going to "Cut of your nose to spite your face".

The Question IS how Badly you get hurt in each round?

Stamina? Great, too bad your legs are broken.

Feb 24 12:57 PM

[Conan the B...:]

Two weeks ago both Trace and MyWealth were pushing a Theory called Backwardation.

According to this theory, Gold would move up because Spot Gold was higher than Gold Futures. Gold went into contango and went up.

Both Parties now ignore what they previously pushed. Mind you, this was just two weeks ago.

What I would like to know is: "Is the Theory Dead or waiting to be reborn?"

Feb 24 01:06 PM

[dieuwer:]

"What They Say and What They Do"

What they say:
[Hillary] "By continuing to support American Treasury instruments, the Chinese are recognizing our interconnection. It would not be in China's interest if we were unable to get our economy moving"
[Hu Jintao] "Now it is more important than any time in the past to deepen and develop China-U.S. relations amid the spreading financial crisis and increasing global challenges"

What they do:
ttp://chinaview.cn/hjt090210/
news.xinhuanet.com/eng...
news.xinhuanet.com/eng...

My money is on what they do, NOT on what they say.
Where are YOU putting your money?

Feb 24 01:22 PM

[myWealth.com:]

Don't remember where I talked about backwardation. I did talk about gold rising and have mentioned it since at least the mid $800s on various sites including my own at mywealth.com. But I'm not ignoring anything because I don't even usually mention backwardations, contangos, etc.

People can go there and go back and see the several articles in full that I've written on the topic of gold.


On Feb 24 01:06 PM paultaut wrote:

> Two weeks ago both Trace and MyWealth were pushing a Theory called
> Backwardation.
>
> According to this theory, Gold would move up because Spot Gold was
> higher than Gold Futures. Gold went into contango and went up.<br/>
>
> Both Parties now ignore what they previously pushed. Mind you, this
> was just two weeks ago.
>
> What I would like to know is: "Is the Theory Dead or waiting to be
> reborn?"
>

Feb 24 02:11 PM

[Trace Mayer:]

paultaut, backwardation is not a theory but an objectively verifiable fact and my articles cite credible and verifiable sources to prove that fact. I did not make the assertions you claim. I did make some assertions in the various articles. I continue to stand by my assertions and do not 'ignore what they previously have pushed'. Here are the verifiable facts which you appear to misrepresent or ignore:

9 Dec 2008 - Discussed gold backwardation and made assertions that extended and prolonged backwardation may precipitate a currency crisis, that the FRN$ store of capital expense will increase and that gold's purchasing power would increase. At the time of the article gold was $771 and is currently $969. Purchasing power was discussed later in the 11 Feb 2009 article.

seekingalpha.com/artic...

4 Feb 2009 - Discussed silver backwardation and the declining gold/silver ratio. At the time of the article the ratio was 72.56 and is currently 68.86.

seekingalpha.com/artic...

11 Feb 2009 - Discussed the continued DOW decline. Made the assertion that gold's purchasing power would continue to increase and focused on the DOW/Gold, DOW/Silver and S&P 500/Gold, S&P 500/Silver ratios. Asserted that the DOW when priced in the metals would continue to get cheaper because of declining potential earnings in those metals. At the time of the article the DOW/Gold was 8.7 ounces and is currently 7.5 and was 7.2 yesterday (23 Feb 2009).

seekingalpha.com/artic...


On Feb 24 01:06 PM paultaut wrote:

> Two weeks ago both Trace and MyWealth were pushing a Theory called
> Backwardation.
>
> According to this theory, Gold would move up because Spot Gold was
> higher than Gold Futures. Gold went into contango and went up.<br/>
>
> Both Parties now ignore what they previously pushed. Mind you, this
> was just two weeks ago.
>
> What I would like to know is: "Is the Theory Dead or waiting to be
> reborn?"
>

Feb 24 02:38 PM

[Mad Hedge F...:]

Gold finally hit a wall just above $1,000, and melted $50. For many traders who got in just above $700 three months ago, it’s time to say thank you very much to Mr. Market and either wait for a substantial pull back, or go on to the next trade. It was taking increasingly larger purchases of physical gold by ETF’s and coins by individuals to push the price up. CME statistics showed the speculators’ position soared to a net long of 215,661 contracts. The SPDR Gold Trust ETF (GLD) bought 5 tonnes of the barbaric relic to 1,029 tonnes in just one day. The turnaround neatly sets up a double top on the long term charts with the high set last year. It may take a couple of more runs, and more bad news, which seems in abundant supply, to get the yellow metal to a true new high.

Feb 24 04:10 PM

[huskerbob:]

Mr. Mad H F T: I am just adding a qualifier to your mention of the GLD purchase: no one can be certain that GLD actually purchased any physical gold. Of course they say they did, but their prospectus makes it clear that neither they nor anyone else will ever have any clue as to how much gold is actually being held by GLD.

“The Custodian is required to use reasonable care in selecting subcustodians, but otherwise has no responsibility in relation to the subcustodians appointed by it, and the Custodian is not responsible for their selection of further subcustodians. The Custodian does not undertake to monitor the performance by subcustodians of their custody functions or their selection of additional subcustodians. The Custodian is not responsible for the actions or inactions of subcustodians” (p. 44)

“In addition, the Trustee has no right to visit the premises of any subcustodian for the purposes of examining the Trust’s gold or any records maintained by the subcustodian, and no subcustodian is obligated to cooperate in any review the Trustee may wish to conduct of the facilities, procedures, records or creditworthiness of such subcustodian.” (p.37)

To make matters worse, the Prospectus states that there will be no written contractual agreements between subcustodians and the Custodian or the Trustee (page 11-12). The Prospectus further states quite clearly that “because neither the Trustee nor the Custodian oversees or monitors the activities of subcustodians who may hold the Trust’s gold, failure by the subcustodians to exercise due care in the safekeeping of the Trust’s gold could result in a loss to the Trust.” (p. 12)." “Custodian and the Trustee will not require any direct or indirect subcustodians to be insured or bonded” with respect to gold held by the subcustodians on behalf of the Trust (p. 11)."
Thanks to Dave Kranzler for picking out these gems.

Feb 24 06:35 PM

[prudentinve...:]

Expect China to start buying our global companies with their hoard of dollar paper, now that they have understood that it will lose value before their mountain of treasuries mature.

Meanwhile, we are keeping busy trying to restore spending on trinkets, leisure, sports, and housing that is unaffordable by its inhabitants.

Feb 24 08:47 PM

[sidney:]

Lets set the story straight on China and its so called Silver standard. China didn't avoid the great depression because it repeated the mistakes of the Europeans in the 1920's IE it hyper inflated instead of acting in fear of repeated hyperinflation due to unsound money policies of the 20's.
The Republic of China went through the worst inflation 1948-49. In 1947, the highest denomination was 50,000 yuan. By mid-1948, the highest denomination was 180,000,000 yuan. The 1948 currency reform replaced the yuan by the gold yuan at an exchange rate of 1 gold yuan = 3,000,000 yuan. In less than 1 year, the highest denomination was 10,000,000 gold yuan. In the final days of the civil war, the Silver Yuan was briefly introduced at the rate of 500,000,000 Gold Yuan. Meanwhile the highest denomination issued by a regional bank was 6,000,000,000 yuan (issued by XinJiang Provincial Bank in 1949). After the renminbi was instituted by the new communist government, hyperinflation ceased with a revaluation of 1:10,000 old Renminbi in 1955.
Which Silver standard were you referring to? And how is hyper inflation any better than a great depression?

Feb 25 12:39 AM

[Kunst:]

Exactly right!


On Feb 24 08:47 PM prudentinvestor wrote:

> Expect China to start buying our global companies with their hoard
> of dollar paper, now that they have understood that it will lose
> value before their mountain of treasuries mature.
>
> Meanwhile, we are keeping busy trying to restore spending on trinkets,
> leisure, sports, and housing that is unaffordable by its inhabitants.

Feb 25 02:08 AM

[Conan the B...:]

Trace: we exchanged a lot of comments regarding your "So Called" Backwardation theory.

I asked for Historical support data, to overlay previous similar periods onto your unproven view. There was no response.

I then asked a very simple Question: If Gold moves into Contango, will you issue a Sell Signal?

Again, I received no response. I asked how long Gold had to be in Contango before you issued a Sell Signal based on Your Backwardation Theory, no response. Gold went back into Contango and is still there.

My Comment at the time of these debates was that I would become bullish as soon as contango was reestablished. It was and I am.

Backwardation is simply a supply/demand situation. It implies Nothing other than short term supply imbalances,

It has No Basis in the History of Physical Gold to work with, there isn't any Historical Data to support your Claim.

As soon as Gold went back into Contango, you stopped writing articles on it.

Why don't you write another Article on why, even without Backwardation, Gold will still move Up?

If you can't handle the Heat, stay out of the Kitchen.

Feb 25 03:01 AM

[Conan the B...:]

Trace: My Comments and your answers are available to all.

My discussion was strictly on Backwardation, nothing else.

Bringing up articles and quotes on other aspects of those articles have no bearing on Backwardation Theory. It either works or it doesn't.

Having said that, I have found a use for it. I expect to employ it as a tool for reentry into the Gold market.

Backwardation! Historical Data prior to 2007?

Feb 25 03:14 AM

[Conan the B...:]

James Turk is not a historical source.

Feb 25 07:03 AM

[HaavBline:]

Not likely any time soon.

From Chinese painful experience, they realize that American companies are like hungry, expensive, vicious beast one should not try to tame. Their own companies have not yet acquired the 'managerial sophistication' to tame such beasts, and they got burned badly in all of their previous attempts. That's right, ALL have been failures, big waste of money so far. The big investments does not even last very long before they had to be written off completely.

Only resource companies with real STUFF in the ground is attractive to them.


On Feb 25 02:08 AM Kunst wrote:

> Exactly right!

Feb 27 12:19 AM