Posts Tagged ‘China’

A Golden Time Bomb

I have no clue what implications this has, but this event will probably tell tales of knowledge preceding its tales of profits. This news came out today but I am still shocked that I haven’t yet received 40 emails regarding it.

Imagine giving a billion people the ability to buy something they really like… on credit. That’s the way I see behind the following headline:

Shanghai Futures Exchange sets details of gold futures; trading starts Jan. 9

Get it? The exchange has decided to raise the minimum contracts to 1000g (about 320 oz.), up from a previously stated 300g, in order to limit speculation by smaller investors. To give you a figure 300g = $81,000 and 1000g = $27,000.

That’s a lot of money. And the Chinese have it, especially those who understand the value of gold. I can see this going both ways. If you remember, a while back Uranium was trading at about $120/lb. up on an amazing run from $10 offering investors who had access to the metal a whopping %1,200 return. Then, Uranium started trading on the U.S. Futures exchange. To say the least it’s down to about $80 now.

In other words, either investors bid up the price too high waiting for the suckers to come speculating on the price rise. When they did they unloaded and how! Or speculators just saw a shorting opportunity from the run-up and profited from it.

The scenario for gold may work the same in the short-term. Chinese institutions may see a selling opportunity and some may even short. However, what I see ion the long-term is shocking. In my opinion this is the government’s vehicle enabling then to buy and sell gold easier and faster. Institutions will also run on board. I can then see pools of smaller investors coming together to grab a piece of the price rise.

Remember what happened when Americans were finally able to buy gold after 30 years? Now imagine that China is faced with the same predicament. This is the early stages of gold coming to the availability of the market.

Again, I have no clue what January 9th may bring. All I can say is that if it goes lower that’s nothing that the investor and the gold-bug haven’t seen before. If on the other hand gold rockets higher it may be the first and last time that the Chinese will see gold so cheap. (Yes, Mao would be pissed!)

So, mark your calendars because we will definitely see history in the making. I’m just not sure what part!


Bush, Paulson tell Chinese they’d be stupid to dump dollar“. One second. Haven’t we seen this movie before? The French… U.S. Debt… Gold window… ah, that’s it.

The Golden Chinese Dilemma

“Some Chinese economists are urging Beijing to quadruple its gold reserves to 2,500 tonnes from the current 600 tonnes because the country foreign exchange reserves had become the world’s largest. Gold reserves have remained unchanged since December 2002″.

China claims to have a dilemma in buying due to rising prices. If this was so in late 2005 how much more so is it relevant today.

But China has a far greater problem that tends to argue not only with the price of metal but rather with the basics laws of supply and demand. Global production has an annual mining output of only 2,500 tonnes.

Even if China were to add 7% to their reserves allocated to gold ($84 billion, and the figure may be higher) at a current price of $675 an ounce, this would swallow the 2,500 tonnes of the entire global production this year!

This of course does not factor in buying from other gold hungry nations (Russia, India) and industry demand (jewelry) and would spur excess speculation from investors the world over. We read “Barclays Capital did a survey of their institutional clients and 70% of them said they would have 5% of their assets in gold in three years time.” Do you have any idea of what a mere 3% is in regard to the current money supply? (Read recent posts Meaningless Money, China Restless, Financial Manipulation and 1900 Dinner Menu).

Investor’s Corner

This brings us to hedging in the markets of gold – and undeniably silver. Spreads, for instance, generate profits not based on a bet on the price of gold, but on the relative change between the months bought and sold. (Do not be hard-pressed if you as well can’t imagine a legitimate economic purpose for these trades).

Similarly, many a hedge fund may go short gold and long stocks for instance, a method that would have been fairly profitable for almost 20 years between 1980 and 2000. The huge short position of over 240 million ounces in silver may be a result of many trades that have ultimately been more profitable than the mere $3 billion bill they’ve racked up. But one thing is for certain and that is that these positions will either be paid off in full (not much of a problem in todays multi-trillion dollar economy) or face serious defaults. (Both scenarios in which would have cataclysmic effects on the overall market.

As Mark Twain said “It’s not the size of the dog in the fight, it’s the size of the fight in the dog.

China Getting Restless – Stephen Schwarzman-style

The Financial Times reports “China to buy 10% stake in Blackstone while yielding voting rights

Why we think this is huge news:

Firstly, as mentioned, this is the first time Beijing has invested its foreign reserve in a commercial transaction and is described, as should be, as a “historic event that changes the paradigm in global capital flows.”

Secondly, this may the be the first of many acquisitions that will be looked at as a monumental move to diversify their U.S. Dollar holdings, signifying a sign of action after much of the talk we’ve been hearing till now.

Thirdly it shows where China is looking – Returns. Sick of a mere 5% that would yield less than $500B over the next ten years, a boost to the 10% range would increase their holdings by over $1T in the next decade. If it were the 1990 they’d be investing in Tech stocks, if it were a few years back they would be buying up real estate and today it’s Private Equity.

So what’s next? I don’t even think the Chinese themselves know, but what I do see in the cards is a range of possibilities. And if China starts buying gold the repercussions can be huge. Nothing is certain at this point but as they say “When there is smoke there may be fire.”


Articles to Read…

Liz Rappaport from asks whether or not the Fed has lost its credibility understating the true inflation.

A new strategy in exiting silver? Roland Watson explains a new trading method in timing silver. (Silver Investors need not bother).

BusinessWeek cites that NovaStar – a Sub-Prime lender – expects to recognize little, if any, taxable income for the next five years. The list rolls on.

A few Market thoughts on current Margins of Safety…

  • The VIX, commonly known as the “fear index,” is hovering around 10, a low point, suggesting a lot of carefree folks out there these days. This level is often a turning point, a calm before the storm, so to speak.
  • The Treasury yield curve inverted months ago, suggesting a recession was on the way. It hasn’t happened.
  • The Dow industrials, transports and utilities all closed at new highs on the same day last week — something that became a routine occurrence in just two years, 1929 and 1986, both preludes to big market falloffs.
  • The current rally is now the third longest since 1900 without a 10% correction.
  • According to the NYSE, margin totaled $285.61 billion in January, up from $275.38 billion in December and passing the previous peak of $278.53 billion. The highest levels ever.
Some Chinese thoughts…

If you are one in a million – In China there are 1,300 others just like you.

Did you know that in Chinese the same words means both crisis and opportunity?

Quote of the Day

My grandfather always said, “Don’t watch your money; watch your health.” So one day while I was watching my health, someone stole my money. It was my grandfather.
– Jackie Mason


China says it long has had a dollar diversification plan. Do You?

Zhou Xiaochuan, governor of the People’s Bank of China, said at a conference in Frankfurt that China has very clear plans to diversify its reserves, which now stand at more than $1 trillion. A wide range of instruments are under consideration, Zhou added.

Central Banks seem to be thinking the same way.

The instruments mentioned are possibly currency diversification into the Euro, oil or even gold. Gold which stood for about 60% of total international reserves in 1980, has since diminished to just 9% in 2005. This leaves immense possibility for gold as an option for Central Banks.

Click Here for Full Article

Is this the demise of the Dollar?