The Move into Hard Assets: The China Factor

Hypocrisy in whatever may deceive the cleverest and most penetrating man, but the least wide-awake of children recognizes it, and is revolted by it, however ingeniously it may be disguised.

Count Leo Tolstoy
1828-1910, Russian Novelist, Philosopher

China is aggressively jumping to hard assets again, they are seeking to unwind their position in the US dollar or at the very least hedge themselves against the upcoming hyperinflationary phase that is going to hit the entire world in the not to very distant future. Their move into copper and sugar clearly illustrates that this is the beginning of trend and that many cash rich nations (Japan, Russia, several countries in the Middle East, etc) will soon follow China’s lead.

One of the reasons for the rise in the price of copper is all but obvious; this reason is known as the China factor. Now that prices are so low, they are busy stock piling this red metal, in addition they know that hyper inflation is about to hit the United States and the rest of the world, for the most part, and so they are busy buying up hard assets in an attempt to at least redeploy part of their vast foreign currency reserves. In the first two months of 2009, Chinas copper imports were up 71% in comparison to those of last year. Most of this buying is to add to the stock pile of the State Reserve Bureau (SRB) which is now in the process of securing 2% of the worlds copper output or 300,000 tonnes.

Our target on copper is still in the 220-240 ranges, and it is possible it could spike as high as 260 before mounting a correction. Once the threat of hyper inflation becomes real, expect all nations with huge reserves to start deploying their Dollars into hard assets.

China’s sugar reserves surged to 2.8 million metric tons, up 75% from 1.6 million; they grew for the first time since 1991; another clear cut sign that China is aggressively looking for new ways to get out of its dollar holdings. It is also aggressively investing in uranium projects In Africa and in central Asian countries such as Kazakhstan.

China and Argentina have come to an agreement that has very serious long term implications for the dollar. China has agreed to a 10.2 billion dollar swap with Argentina that would allow it to receive Renminbi (Yuan) instead of dollars for its exports. This clearly could mark the beginning of a new world currency reserve one that will replace or compete with the dollar.

Adding even more fire to the picture China Wants SDRs to replace the Dollar as the Global Reserve Currency

Actions speak louder than words. Less than a week after he wrote an article proposing that the dollar be replaced as the world's international reserve currency, Zhou Xiaochuan, China's central bank governor, signed off on a $10.2 billion currency swap with Argentina. Under the terms of the deal, China will receive renminbi instead of dollars for its exports to Latin America. An Associated Press report notes that Beijing has signed "similar deals to bypass the U.S. currency with South Korea, Malaysia, Belarus and Indonesia." Such swaps -- all signed since December -- add up to more than $95 billion

China's views are starting to gain support. Russian President Dmitry Medvedev has called upon the G-20 leaders to explore alternatives to the dollar as a reserve currency. Not to be outdone by the Chinese, Venezuelan President Hugo Chavez has called for the creation of a "new oil-backed currency to challenge the U.S. dollar." Chavez sought support for his proposal this week from among the Arab states at a conference of Arab and Latin American countries in Doha, Qatar. knowledgetoday.wharton...;

Conclusion

Investors would be wise to hedge themselves by deploying some of their money into hard assets such as oil, Gold, Silver, Timber, natural gas etc.

Relevant ETFs

Gold: GLD
Silver: SLV
Natural Gas: UNG
Oil: USO

Imagine believing in the control of inflation by curbing the money supply! That is like deciding to stop your dog fouling the sidewalk by plugging up its rear end. It is highly unlikely to succeed, but if it does it kills the hound.

Disclosure: We have positions in SLV, USO and UNG.

Comments

[Prudent Man...:]

You nailed it!

China has also moved down the yield curve as they can see where the dollar and interest rates are going. They didn't send all those PhD. students here for nothing. They not only study what we do right but, also, wrong.

May 28 05:22 PM

[buyforeclos...:]

You wrote: China is aggressively jumping to hard assets again, they are seeking to unwind their position in the US dollar or at the very least hedge themselves against the upcoming hyperinflationary phase that is going to hit the entire world in the not to very distant future

China loaded up on copper and other commodities at MUCH lower prices than are currently available. They were smart to do so but more importantly had the MONEY to do and used dollars to buy all those commods when the prices were down and the dollar was very strong ( no evidence of this but it makes perfect sense )

To say others will follow suit is speculation at best. China already has its NUT in commods so for the sake of commod prices I hope their is demand elsewhere or copper could be at 180 as opposed to 240. Hyperinflation is a possibility in the future but the NOT SO DISTANT future? Right now DEFLATION is the issue. If the markets stall and fall you can be sure that the dollar gets stronger and the commod prices ( steel, copper, iron ore, oil, ng,...) fall like a rock...and so will currencies such as the Aussie dollar, and Canadian dollar.... the pound and euro will get punished as well..

you act as if the world economies are actually improving although you and nobody else ( including all the so called analyst ) have given us any real proof....all here say and manipulation if you ask me. I am long Oil service stocks as its obvious they are going higher...but probabl;y have a big pullback when oil heads back to 55/50 late in the summer or alot sooner if the markets falter.

Your obviously long gold and copper, oil stocks... and should be for near term.... don't try and pump them too hard for too long or you will have some enemies here later who followed your advice and got caught at the end of the pyramid scheme.

May 28 09:00 PM

[buyforeclos...:]

Hmmmmmmm.Markets went from dead cold to blazing hot in just over 2 months? Everything is fine again right? The recessions over in 5 months huh? lol I am in the market because I go with the flow...that being said,

I have never seen anything like the manipulation i have seen the last 2+ months. Is it a coincidence that company after company over the last 2 weeks has used this pop in the market to raise money through secondary share offerings ( heavy dilution) and Conv note sales? Im sure it had nothing to do with the difficulty of raising capital. (sarcasm intended)
I think not. I think there is alot more to the sudden green shoot theory than we pawns realize... conspiracy theories? Well I have never been one for that line of thinking but something sure stinks...but it will probably be like that smell in the attic, you know that something is dead or rotten, but because of a limited crawl space you will never get a look at it and eventually you will forget it all together.

On May 28 05:22 PM Prudent Man CFA wrote:

> You nailed it!
>
> China has also moved down the yield curve as they can see where the
> dollar and interest rates are going. They didn't send all those PhD.
> students here for nothing. They not only study what we do right but,
> also, wrong.

May 28 09:12 PM

[harammph:]

The only country not participating in the Base Metal buying is the USA. Just like there is no set energy policy, We aren't preparing for next years Infrastructure stimulus.

You wonder why everything will start to inflate rather quickly next year, its because the USA will start buying After everything Has gone up.

Typical Bureaucratic idiocy.

May 29 12:19 AM

[User 357705:]

Typical American exceptionalism.


On May 29 12:19 AM harammph wrote:

> The only country not participating in the Base Metal buying is the
> USA. Just like there is no set energy policy, We aren't preparing
> for next years Infrastructure stimulus.
>
> You wonder why everything will start to inflate rather quickly next
> year, its because the USA will start buying After everything Has
> gone up.
>
> Typical Bureaucratic idiocy.

May 29 01:16 PM

[Chandragupta:]

You said it! The writing is clearly on the wall....

May 29 01:50 PM

[Mad Hedge F...:]

this will go on for decades. If you have been aggressively long commodities of every size, shape, color, and flavor, as I have been all year (www.madhedgefundtrader...), then you just had one of the best trading months of your career. The CRB index rocketed by 17% in May, the best move since the early days of the first oil shock in 1974. That year I spent weekends driving my Volkswagen van from Los Angeles down to Mexico, where I filled it with jerry cans of gasoline, because it was still selling for 25 cents a gallon there (an early attempt at arbitrage). I finally sold the vehicle and used the cash to buy a one way ticket to Japan (remember that John E?). My favorites went up the most. Crude leapt 29%, Silver clocked in a 23% return, and gold was up 9%. The producing stocks also did spectacularly well. Coal producer Massey Energy (MEE) soared by 44%, dragged up by oil, while my beloved Freeport McMoran (FCX), with the world’s largest gold and silver reserves, rose by 30%. While these things are all superheated on a short term basis, the ten year agreements are still good. You can find massive Chinese buying behind almost every one of these.

May 29 09:42 PM

[Tom E.:]

Stockpiling raw materials makes sense if you think demand for finished products will return, like before.

On the other hand, if western consumers save more and spend less, China may be stuck with inventories of once cheap materials that not only don't pay interest, but incur storage costs. These materials may also drop in price.

May 30 09:11 AM

[EX-AD-MAN:]

Tom: China is NOT banking on a return of US consumer demand. They are banking on dramatically increased consumer demand throughout SE Asia, India and even Africa, 15-20 yrs out.

May 30 10:36 AM

[mbkelly75:]

Exactly right - China gets ahead of most simply because they do look long-term instead of short-term. It is not unusual for Asians (not just China - but all the Asian peoples) to make plans and counter-plans for 25, 50 or even the next 100 years. I am obviously not Asian - but I have made a great deal of money over the last 50+ years in the markets by doing the same basic thing. My investments are different from the writer's, but also focus right now on commodities by way of producers and their dividend-paying stocks.


On May 30 10:36 AM EX-AD-MAN wrote:

> Tom: China is NOT banking on a return of US consumer demand. They
> are banking on dramatically increased consumer demand throughout
> SE Asia, India and even Africa, 15-20 yrs out.

May 30 12:14 PM

[Austrothinking:]

"Imagine believing in the control of inflation by curbing the money supply! That is like deciding to stop your dog fouling the sidewalk by plugging up its rear end. It is highly unlikely to succeed, but if it does it kills the hound."

It's about time we do kill the hound. In my view, the hound is governmentally created central banks. Take the U.S. Federal Reserve. The creator of money and credit inflation. Why else is China doing swap deals with Argentina et al to avoid trading in US dollars? They know the US dollar buys less today than it did yesterday and with all the US bailouts, unbalanced budgets, and unfunded liabilities, the US can never tax enough to raise the money to pay the bills. So the US will print, print, print and defacto default on all its debt.

The recession is nowhere near over, people are still losing jobs and there are no incentives for manufacturing to return to the US. Be sure there is more pain to come, at least for us in the US. And we can give thanks to the following for all this chaos devolving us away from the foundations of natural rights/law and liberty.

Thank you Alexander Hamilton, Henry Clay, Abe Lincoln, the Federalists, the Whigs, the Progressives, TR, the interventionists, Taft, Wilson, the imperialists, Coolidge, FDR, the Republicans, the Democrats, the 17th Amendment, the income tax, and the Federal Reserve Act, the house, the senate, the courts, and finally us the people for falling for the notion that the central government can be trusted to act "for the common good".

Jun 02 05:44 PM