Bright and Shiny Upside for Copper and Gold Miners, Part 2

by: Gary Dorsch

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China has long utilized the adjustment of required bank reserves for mopping-up or injecting yuan into the economy. Every half-point increase drains roughly 250 billion yuan ($36 billion). On Feb 12th, the PBoC ordered local banks to increase reserves for a second time to 16.50%, without resorting to lifting interest rates. Beijing said it will target a +8% growth rate in the economy in 2010, and would act to prevent inflation from flaring above 3 percent. In order to achieve these twin-objectives, the PBoC vows to slow the growth rate of the M2 money supply to a +17% growth rate.

Copper prices fell by 20% to as low as $6,250 /ton in London, amid an initial knee-jerk reaction to the PBoC’s tightening moves. However, speculators viewed copper’s drop to $6,250/ton, as a good buying opportunity, and the red-metal has since rebounded to $7,500/ton. The PBoC’s tweaking of monetary policy represented just a tiny fraction of the 14 trillion yuan of stimulus injected into the Chinese economy. In turn, FCX and other metal miners were quick to recoup much lost ground.

China’s exports are growing again, up 45% from a year ago, and “hot-money” inflows are rising, adding to the pool of cash sloshing about the Chinese economy. China’s stash of foreign currency reserves has mushroomed to $2.4-trillion.

At the same time,in order to keep the yuan tightly pegged to the US-dollar, the PBoC is buying vast quantities of US dollars, euros and yen for its FX-reserves, and is printing huge quantities of Chinese yuan - fueling dangerous bubbles in stocks and real estate prices, and blowing bubbles in the Shanghai commodities markets.

Beijing is nurturing fertile ground for the Shanghai gold market, which has already risen 54% against the yuan, since the central bank opened the money spigots in November 2008. China is now the world’s #1 miner and buyer of gold, with output reaching 314-tons last year. Gold demand in China grew by 14% to around 450-tons in 2009, outstripping supply. Speculation is rife that Beijing is clandestinely buying gold from state owned miners, to avoid sending the market price sharply higher, and much of China’s newly mined gold may well be sitting in government coffers.

Trying to dampen the smoldering fire in the gold market, and to keep a lid on inflation expectations, Chinese officials utilize the media to brainwash the general public. On March 9th, Yi Gang, China’s FX chief, said Beijing has no interest in amassing the yellow metal. The international gold market is very limited. If we purchase gold on a massive scale, it would definitely push-up global gold prices. It is, in fact, impossible for gold to become a major investment channel for China’s foreign exchange reserves. We have 1,000-tons now, and even if we double that holding, it would equal about $30-billion. It would just increase the level of gold to about 2% of China’s FX reserves from the current 1-percent,” he said.

Beijing has several “ideas and tool kits to manage inflationary expectations,” Liu Mingkang, chief of the China Banking Regulatory Commission, told the official Xinhua news agency on March 9th. “Don’t get into too much of a panic or be afraid about inflation. China’s CPI and PPI may rise slightly, but there’s only a small chance that inflation will be more than moderate,” he said. However, very few Shanghai gold traders are duped by the government’s brainwashing operations.

Gold is an international currency and thus support or resistance can come from many different quarters around the globe. The largess of G-20 governments, providing $14-trillion of various stimulus packages and guarantees for banks has spawned all types of speculative activity, including the most opaque form of derivatives - credit default swaps ((CDS)), which played a key role in driving Lehman Brothers, Bear Stearns and American International Group (AIG) into bankruptcy.

Gunslingers were able to return to the gambling table, fully aware that their losses will be covered up in future by G-20 governments. This has led oligarchic bankers to intensify their involvement in the most hazardous forms of speculation. Based on the near-zero interest rates, finance houses are able to borrow funds at next to nothing, and can easily engage in carry trading in liquid commodities or stocks.

Attracted to the highly indebted Greek bond market like vultures to a decaying corpse, CDS traders at major banks and hedge funds moved in for a quick kill, with a surge of activity, that has tripled the cost of insuring Greek debt. And the louder the ticking time bomb of a Greek default, - the more likely that CDS speculators will hit the jackpot, including a plunge of the Euro, from a currency union break-up.

Although gold is roughly 10% below its all-time high against the US-dollar, the yellow metal has catapulted to new record heights against the Euro, tracking the cost of insuring Greek bonds against default. While France and Germany are expected to arrange some type of interim bail-out for Athens, whatever form of rescue package is devised, it’ll probably be financed the clandestine monetization of sovereign debt by the European Central Bank, through backdoor lending to banks.

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The combination of super-easy G-20 money policies, exploding sovereign debt, and currency devaluations, have buoyed the price of gold, including in London, where the yellow metal hit an all-time high of 760-pounds /oz this week. Rising bets on the British pound falling below $1.500 have already hit pay-dirt, amid projections that the UK’s budget deficit could reach 200-pounds this year, or 13% of GDP, forcing the Bank of England to begin ramping-up its money printing machine again, to monetize a huge chunk of the impending supply of gilts.

On March 9th, BOE member Adam Posen said:

There’s always a danger of reading too much into short-term currency moves. Right now they’ve gotten bored of beating up on Greece, and so they have to find something else to do, so they’re turning around to us. If markets really believe there’s a major inflation threat -- then you would be seeing interest rates shooting way up, and you would be seeing the pound moving a lot lower.

Barrick Gold (NYSE:ABX), the world’s #1 gold miner, is well positioned to climb higher if the PBoC doesn’t act to slow the M2 growth rate and G-7 central banks refuse to drain the global liquidity swamp. ABX has completely eliminated its fixed-price hedge book, which totaled 3-million ounces, to take full advantage of rising gold prices. Barrick expects to produce around 8.1-million ounces of gold this year. Worldwide, gold miners de-hedged 8-million ounces last year, expecting a wave of central bank diversification out of paper currency, and into precious metals.

There’s lots of fuel left in the tank, to lift the base and precious metals and miners in the weeks ahead. On March 10th, Bank of Japan (BoJ) member Miyako Suda hinted the central bank would expand its printing operations, beyond the current 18-trillion yen each month, to help boost the Tokyo stock market. “The BOJ intends to continue making its contribution to help the Japanese economy escape deflation and return to a sustained growth path under price stability,” Suda said. Typically, the modus of operandi, is a brazen attempt at devaluing the Japanese yen.

Disclosure: No positions

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