Its happening.

Media needs to spin another excuse.

China - energy and minerals

China May Boost Energy, Mining Acquisitions by Half

Aug. 14 (Bloomberg) — China, unfazed by failures to invest in Rio Tinto Group and Unocal Corp., will boost spending on oil and mining acquisitions by at least half this year to take advantage of lower valuations after commodity prices slumped.

State-owned Yanzhou Coal Mining Co. yesterday agreed to buy Australia’s Felix Resources Ltd. for about A$3.5 billion ($2.9 billion), a day after Sinochem Corp., China’s biggest chemicals trader, offered to buy Emerald Energy Plc for 532 million pounds ($881 million) to gain oil fields in Syria and Colombia.

China National Petroleum Corp.’s plan to buy Repsol YPF SA’s Argentine unit may push Chinese purchases of overseas commodity assets to $43 billion this year, a 48 percent increase on 2008, according to data compiled by Bloomberg.

“The Chinese don’t have enough nickel, don’t have enough oil, and they don’t have enough copper,” Jim Rogers, chairman of Rogers Holdings and the author of books including “Investment Biker” and “Adventure Capitalist”, said in a telephone interview yesterday. “There’s a crisis coming. They are going around the world buying up what they can. They’re preparing for a rainy day.”

Bids for resources by China, whose $2.1 trillion in currency reserves are the world’s largest, have been met with opposition in the U.S. and Australia. Neither concern over its growing influence nor the arrest of four Rio executives in Shanghai have stopped Chinese companies from buying assets abroad as the nation’s 4 trillion yuan ($585 billion) economic stimulus spurs demand.

‘Bolder Deals’

“China will see larger and bolder deals,” said Brian Gu, the Hong Kong-based head of mergers and acquisitions for greater China at JPMorgan Chase & Co., the third-ranked adviser by transaction value this year. “The growing outbound mergers and acquisitions activity is going to be a long-term trend and the volume and activity are here to stay.”

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, dropped 36 percent last year, the biggest annual decline since at least 1957. The measure has gained 15 percent this year on signs that the recession may be ending.

Chinese energy companies have spent at least $13 billion on overseas assets since December as they take advantage of lower valuations caused by the slowdown.

Yanzhou, China’s fourth-biggest coal miner, is offering A$18 a share for Felix, including a dividend and stock in a spin off of a unit of the Australian company.

‘Inferior’ Offer

The offer, recommended by Felix’s board, is “inferior” and shareholders should reject it, Sophie Spartalis, an analyst with Macquarie Group Ltd., said in a report today. A bid of between A$23 to A$25 a share would be “more reasonable,” she wrote.

Felix rose 4.1 percent to A$17.60 in Sydney trading. Yanzhou climbed 2.3 percent in Hong Kong to HK$12.40 while its Shanghai shares rose 3.7 percent to 20.72 yuan.

The state-owned parents of PetroChina Co., China Petroleum & Chemical Corp. and Cnooc Ltd. are studying investments in companies in Africa, Latin America, the Middle East and Central Asia, according to JPMorgan’s Gu and Mike Arruda, a lawyer at Jones Day in Hong Kong who advises on mergers and acquisitions in the oil and gas industry. Both declined to disclose details of deals they are advising on.

Controlling Stake

China National Petroleum, the parent of PetroChina and the nation’s biggest oil company, is considering offering $13 billion to $14.5 billion for a controlling stake in Repsol’s unit, three people familiar with the matter said last month.

China Petrochemical Corp., the country’s second-biggest oil company, in June agreed to buy Geneva-based Addax Petroleum Corp. for C$8.3 billion ($7.6 billion) in China’s biggest overseas takeover to date.

Purchasing Addax, which has oil reserves in Iraq’s Kurdish territory, shows Chinese oil companies are “going for bigger transactions,” said Arruda, who is advising on what he described as “significant” acquisitions. “These deals seem to reflect an appetite we have not seen before.”

China bought record volumes of oil and iron ore in July, according to customs figures released Aug. 11.

The world’s fastest-growing major economy consumes more than a third of the world’s aluminum output, a quarter of its copper production, almost a tenth of its oil and accounts for more than half of trading in iron ore. Last year, China bought $211 billion worth of iron ore, refined copper, crude oil and alumina, according to government data.

Demand, Imports

China’s oil consumption doubled in the last decade, rising to 8 million barrels a day last year from 4.2 million barrels in 1998, according to BP Plc’s Statistical Review. The world’s third-largest economy imported 3.6 million barrels of oil a day last year, meeting about 45 percent of its needs.

China’s increasing reliance on imported crude means the scale of acquisition deals has to increase, said Paul Ting, president of New Jersey-based Paul Ting Energy Vision LLC, a consulting company specializing in Chinese oil and gas markets.

The country’s crude needs may rise to more than 11 million barrels a day in five years with China’s ageing oilfields unable to produce the extra capacity needed, Ting said.

China National Petroleum said on May 13 it wants overseas crude production to match domestic output by 2020. Chairman Jiang Jiemin said CNPC produces less than 8 percent of its oil overseas and foreign acquisitions and ventures must be increased. “We want overseas production to contribute half,” he said at the time.

Australian Opposition

Bids for resources by China have been met with opposition from lawmakers in Australia.

Melbourne-based Rio, the world’s third-largest mining company, abandoned a tie-up with Aluminum Corp. of China, or Chinalco, in June. The arrest of four Rio executives in July has strained relations between the countries. They were formally arrested on charges of trade secrets infringement and bribery, China’s Supreme People’s Procuratorate said Aug. 11, according to a Xinhua report.

Some 57 percent of Australians said Chinese mining investments should be resisted because the nation’s interests would be “better served” with local ownership, according to a poll of 890 people conducted by Essential Research in April.

Opposition to Chinese investment helped block Cnooc’s $18.5 billion bid for Unocal in 2005 while Haier Group Corp. lost out in the race to acquire U.S. appliance maker Maytag Corp. in the same year.

Unocal, Repsol

Cnooc, 66 percent-controlled by state-owned China National Offshore Oil Corp., abandoned its cash offer for Unocal after being outmaneuvered by Chevron Corp, the second-largest U.S. oil company. Chevron purchased the El Segundo, California-based oil and gas producer for $17.8 billion amid political opposition to the Chinese approach in Washington.

CNPC’s approach for Repsol’s Argentine unit is unlikely to face such obstacles from Spain, according to Nitin Sharma, an analyst at JPMorgan Cazenove Ltd. in London.

“We do not believe that the Spanish government will veto Repsol YPF plans to divest a controlling stake in YPF,” Sharma wrote in a report last month.

Original Article

China - Hungry Dragon

I have been saying for a long time that China has been aggressively stockpiling commodities, buying mineral rights all over the globe, and buying up companies that produce products of the earth.

This signals a new tactic for the Chinese: outright unsolicited offers for mining companies.

Normally the Chinese are more reserved, tactful, willing to be patient and win via masterfully executed maneuvers – much like Sun Tzu’s Art of War.

It seems their patience, as well as their willingness to depend on the dollar retaining its value (and thus the buying power of their portfolio) is coming to an end.

I think this is the beginning of an ever more aggressive stance towards purchasing commodities and raw materials. They know the dollar is going to the deadpool of currencies, and want to buy while it still commands the value it does.

Gold will again reign as the king of currencies.

China makes unexpected grab for Canadian miner

State-controlled Jilin Jien launches a surprise bid for Canadian Royalties, a stark change in tactics for the Asian superpower

ANDY HOFFMAN

From Tuesday’s Globe and Mail Last updated on Wednesday, Aug. 12, 2009 02:44AM EDT

China’s insatiable hunger for natural resources has officially turned hostile.

State-controlled Jilin Jien Nickel Industry Co. Ltd. launched a surprise $148.5-million unsolicited takeover bid for Canadian Royalties Inc. yesterday, marking one of the first times the Asian economic superpower has gone after foreign resource assets without first winning a friendly agreement with management.

China has become an active acquirer of foreign resources amid the global economic crisis, investing in copper, oil and iron ore needed to fuel its fast-growing economy. But despite massive financial resources and a mandate to diversify its $2-trillion (U.S.) in foreign exchange holdings into so-called hard assets such as commodities, most of China’s resource deals have been friendly.

The hostile offer comes as federal Finance Minister Jim Flaherty is in Beijing on a trade mission to encourage Chinese investment in Canadian companies.

“China has a need for resources. China has … substantial U.S. dollar cash reserves,” Mr. Flaherty told reporters yesterday. “China is looking for investments abroad. Commercial investments, subject to proper governance, are welcomed in Canada.”

Mr. Flaherty wants China to invest in publicly traded Canadian companies. His comments suggest that, despite political and security concerns, Ottawa is comfortable with such an investment structure. Mr. Flaherty plans to meet today with Lou Jiwei, chairman of China’s $200-billion sovereign wealth fund.

The unexpected bid for Canadian Royalties, which is developing the Nunavik nickel project in northern Quebec, marks a significant change in tactics for a Chinese state entity. “This is new. … This could be the tip of the iceberg,” one mining investment banker said.

Glenn Mullan, chairman and chief executive officer of Canadian Royalties, said the takeover offer blindsided his company. Neither Jien nor its Canadian partner, Goldbrook Ventures Inc. of Vancouver, which has a 25-per-cent stake in the company created to make the bid, contacted Canadian Royalties’ management before launching the offer.

“This one has a long way to go. I think you’ll see lots of interest in Canadian Royalties going forward,” Mr. Mullan said in an interview.

Canadian Royalties was a market darling during nickel’s heyday in 2007, when the price of the metal used to make stainless steel soared above $20 a pound.

However, the commodities crash and the credit crisis last fall resulted in a sharp reversal of fortune for the Montreal company. Financing for the $500-million Nunavik project collapsed and Canadian Royalties was forced to put the operation on care and maintenance.

Mr. Mullan said Jien and Goldbrook are taking a run at the weakened company in an attempt to pick up its valuable resources on the cheap. The Nunavik project contains approximately 20 million tonnes of ore, grading about 1 per cent nickel and 1 per cent copper. Because of its small size, the bid would not require Ottawa’s approval under the Investment Canada Act.

“At the end of the day, this is all about assets, commodities – nickel specifically – and China’s appetite for commodities,” Mr. Mullan said.

The company has hired advisers and expects to officially respond to the bid soon.

In 2004, a bid for Canada’s Noranda by state-backed China Minmetals Corp. fell apart amid pressure from Canadian politicians to scrap the takeover. In 2005, China National Offshore Oil Corp. pulled an $18.5-billion offer for Unocal Corp. following a firestorm of opposition from U.S. legislators. Australia recently blocked a $1.7-billion bid for Oz Minerals by Minmetals, citing national security concerns. The deal had to be restructured to exclude a key mine asset near an Australian military site.

In a more typical, friendly, deal struck last month, sovereign wealth fund China Investment Corp. (CIC) agreed to invest $1.74-billion to become the largest B-class shareholder in Teck Resources Ltd., Canada’s biggest base metals miner.

Original Article

They are fully aware that inflation is going to send prices of real goods through the roof, and we are heading into a long and strong bull market in tangible assets.

Yanzhou close to Australian coal deal

By Peter Smith in Sydney

Published: August 10 2009 07:47 | Last updated: August 10 2009 18:37

China’s Yanzhou Coal Mining is in advanced talks to buy Felix Resources in a cash takeover that is expected to value the Australian coal mining group at about A$3.7bn (US$3.1bn).

If the deal is agreed and cleared by regulators, it would be one of China’s largest foreign takeovers and the country’s biggest Australian deal to date.

Felix on Monday requested that its shares be suspended from trading pending the outcome of “negotiations regarding a potential change of control transaction”.

The shares, which had traded at less than A$5 this year, last traded at A$16.90. However, the Chinese group was understood to have pitched its offer at about A$19 a share, a person close to the situation said.

At that level, Felix would be worth A$3.7bn.

Reports in Australia of a bid closer to A$22 a share were wide of the mark, the person said, adding that a deal could be announced this week provided it did not hit last-minute hurdles.

Yanzhou has been interested in Felix since 2008. However, early talks broke down as the financial crisis deepened and commodity prices collapsed.

However, a rebound in commodity markets has led to a rerating in coal miners’ share prices, which have also been helped by an upturn in mergers and acquisitions activity.

Noble, the Hong Kong-based commodity supplier, this year won control of Australia’s Gloucester Coal when it agreed to pay A$460m for the 43 per cent of shares it did not already own.

Peabody Energy, the US coal miner, has recently made bullish comments about demand from India for thermal coal.

Yanzhou’s interest in Felix highlights China’s strategic interest in Australian resources.

A $19.5bn investment by Chinalco into Rio Tinto collapsed in June when the Anglo-Australian miner abandoned talks. Yet, approaches by other Chinese groups for Australian assets have been more successful.

Oz Minerals accepted an offer from Minmetals in June to purchase the company’s mining assets after the Chinese group raised its offer in a pre-emptive move to head off opposition.

Australia’s coal mining sector has attracted a number of other international companies, including Switzerland-based Xstrata, which bought Jubilee Mines for A$3.1bn in February 2008, while Luxembourg’s ArcelorMittal acquired 19.9 per cent of Macarthur Coal.

Felix is a coal mining and exploration company with projects in Queensland and New South Wales. It produces high-grade semi-soft coking and ­thermal coals.

Felix owns 15.4 per cent of the Newcastle Coal Infrastructure Group’s new terminal in the port city of the same name, which is one of the world’s biggest coal export terminals.

Yanzhou, which had its shares suspended in Hong Kong on Monday, could not be reached for comment.

Original Article

The Chinese are pretty smart cookies. Ya, I know, I go on and on about the Chinese, but why shouldn’t I?

In many ways, they are taking the exact same path the US took in its rise to dominance.

The US used to have strategic stockpiles of virtually everything, from base metals to rare metals used in military applications, to silver, gold, oil, etc. Today, those stocks stand depleted, or completely sold off.

China on the other hand is buying raw materials hand over fist. The copper consumption of the Chinese is off the charts for example. This is a simple and expedient way for China to diversify their massive stockpile of USD denominated foreign reserves (roughly $2Trillion) and buy up commodities while the USD is still retaining its value, as well as position themselves in the investments that will hold the greatest value moving forward.

If I were diversifying out of my reserves I would also buy US Treasuries, not because I thought they were worth anything, but because it maintains the buying power of my other $2Trillion USD…call it the cost of doing business. Keep in mind, the Chinese have also found a means of using their USD Treasuries as collateral for direct exposure to the commodities markets via hedge funds…this puts a backstop in place that if the US wanted to slam commoditites prices to prop up the dollar it would do so at the potential risk of devaluing the Treasury instruments the Chinese are using as collateral for their margin calls. Quite brilliant.

Then, when the fiat system resets, China will be holding the aces…commodities…both in raw form and the companies that produce them.

Gold and silver will be much more relevant as money moving forward, do not forget there are 1.4 QUADRILLION dollars worth of OTC derivatives currently in the process of blowing up…it is the biggest paper market on earth..that virtually no one knows about or talks about. As the current fiat currency cycle hurtles towards a reset, people will rush into ‘honest money’.

China to deploy foreign reserves

By Jamil Anderlini in Beijing

Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.

“We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats late on Monday.

Mr Wen said Beijing also wanted Chinese companies to increase its share of global exports.

The “going out” strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China.

Qu Hongbin, chief China economist at HSBC, said: “This is the first time we have heard an official articulation of this policy … to directly support corporations to buy offshore assets.”

China’s outbound non-financial direct investment rose to $40.7bn last year from just $143m in 2002.

Mr Wen did not elaborate on how much of the $2,132bn of reserves would be channelled to Chinese enterprises but Mr Qu said this was part of a strategy to reduce its reliance on the US dollar as a reserve currency.

“This is reserve diversification in a broader sense. Instead of accumulating foreign exchange reserves and short-term financial assets, the government wants the nation to accumulate more long-term corporate real assets.”

State-owned groups, particularly in the oil and natural resources sectors, have stepped up their hunt for overseas companies and assets on sale because of the global crisis.

China Investment Corp, the $200bn sovereign wealth fund, has been buying stakes in overseas resources companies and has taken a 1.1 per cent stake in Diageo, the British distiller.

In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies.

“Everyone is saying we should go to the western markets to scoop up [underpriced assets],” said Chen Yuan. “I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.”

“India’s gold demand as reflected in imports have fallen drastically in the first six months,” Harmesh Arora, vice president of the Indian association said today in a phone interview from Mumbai. “There are still no signs of demand picking up as global prices are moving higher,” said Arora, who also believes China could overtake India in gold consumption.

Still, India meets most of its demand from imports, some of which are brought in through unofficial channels and are not represented in official data, said Mukul Sonawale, partner of Mumbai-based Narrondass Manordass Co. and a past president of the Bombay Bullion Association.

“China can emerge as the world’s biggest consumer only on paper,” he said. “The official figures of imports will be quite deceiving as they don’t capture all the imports. With India doubling the import duty on gold, the unofficial channel is bound to increase.”

There is an ancient saying of ‘He who has the gold, makes the rules’. This isnt just a cliche, but rather proven out by historical evidence. Wherever the largest stocks of gold were, the nations who have held it were usually the most influential nations of their time period.

Egypt, Rome, Byzantium, Western Europe and England, then the USA.

The US gold stocks have not been audited since the 50’s, and many analysts believe that what is claimed to be there is alot more than what is actually there.

China is still making strong strides to make the Yuan a fully convertible currency. When the veil spun by the mass media comes off, people will run to whats ultimately safe, which is gold and silver.

China May Overtake India in Gold Demand, Council Says

By Sophie Leung

July 24 (Bloomberg) — China may overtake India to become the world’s top gold consumer this year, the World Gold Council said, as the nation became the first of the major economies to rebound from the global recession.

Jewelry demand in China expanded in the first quarter while dropping in India, Marcus Grubb, a managing director at the London-based council, said today at a conference in Hong Kong. Chinese gold demand will keep rising, he said.

China’s economy grew 7.9 percent in the second quarter after a 4 trillion yuan ($586 billion) stimulus package spurred record lending and consumption. India’s gold purchases slumped 54 percent in the six months ended June after a decline in the rupee pushed up the cost of owning bullion, cooling demand from housewives and jewelers, the Bombay Bullion Association said.

“There is a possibility that China might overtake India as the world’s largest gold consumer this year,” Hou Huimin, deputy head of the China Gold Association, said by phone from Beijing today. “India’s gold consumption is reportedly dropping this year due to the financial crisis.”

Total demand from India in the first quarter fell 83 percent to 17.7 metric tons, from 107.2 tons a year earlier, according to figures from the World Gold Council. Purchases in China rose 1.8 percent to 105.2 tons from 103.3 tons. Total Chinese demand for gold was six times that of India in the first quarter, the council said in May.

‘Consumption Growing’

“China’s consumption is growing and this year’s will surely be more than last year’s,” Hou said.

China consumed nearly 400 metric tons of gold last year, while demand in India was more than 650 tons, according to council data, which cited statistics from GFMS Ltd. Global demand rose 3.8 percent to 3,658.6 tons, or $101.8 billion, the council said Feb. 18.

Bullion prices have gained 7.6 percent this year as the global recession spurred demand for safe haven assets. Gold for immediate delivery was little changed at $949.65 an ounce at 5:39 p.m. in Hong Kong.

China, the world’s biggest gold producer, has increased reserves by 76 percent to 1,054 tons since 2003 and has the world’s fifth-biggest holdings by country, Hu Xiaolian, head of the State Administration of Foreign Exchange, said in April.

Growing demand in China won’t necessarily boost imports of the metal as rising production may be able to satisfy additional consumption, said the World Gold Council’s Grubb. China’s production of gold has risen at rate of 7 percent to 8 percent annually over the past five to six years, he said.

Imports

“It depends if the demand is rising faster than production,” Grubb said in an interview. “At the moment, they are roughly in balance.” China will seek to boost gold output to 290 tons this year from 282 tons in 2008, the Ministry of Industry and Information Technology said on March 20.

Gold imports by India in the six months ended June 30 plunged to 63.8 tons from 139 tons a year earlier, the Bombay Bullion Association said July 13. Imports may fall further after the government doubled the import duty this month, it said.

“India’s gold demand as reflected in imports have fallen drastically in the first six months,” Harmesh Arora, vice president of the Indian association said today in a phone interview from Mumbai. “There are still no signs of demand picking up as global prices are moving higher,” said Arora, who also believes China could overtake India in gold consumption.

Still, India meets most of its demand from imports, some of which are brought in through unofficial channels and are not represented in official data, said Mukul Sonawale, partner of Mumbai-based Narrondass Manordass Co. and a past president of the Bombay Bullion Association.

“China can emerge as the world’s biggest consumer only on paper,” he said. “The official figures of imports will be quite deceiving as they don’t capture all the imports. With India doubling the import duty on gold, the unofficial channel is bound to increase.”

Original Article

Here is a little global economy roundup:

Many still think the economy is on the verge of recovery. While the rest of the developing world continues to steam ahead plowing through obstacles, the western world continues to spiral downward. This still does not take into consideration ALT-A and ARM loan resets through 2011.

July 9 (Bloomberg) — The $3.5 trillion commercial real estate market is a ticking “time bomb” that may lead to a second wave of losses at large U.S. banks, congressional Joint Economic Committee Chairwoman Carolyn Maloney said.

About $700 billion in commercial mortgages will need to be refinanced before the end of 2010 and “doing nothing is not an option,” Maloney, a New York Democrat, said at a committee hearing today. This “looming crisis” may lead to significant losses for banks, force shopping center and hotel owners into bankruptcy, and impede economic recovery, she said.

Meanwhile, the rest of the world forges onward.

The IMF  claims Asia cannot decouple from the western world economies and will not continue to grow until the west recovers…this article doesn’t agree. Also….has the head economist of the IMF forgotten that China has almost $2 Trillion in savings that it can spend?

SAN FRANCISCO (MarketWatch) – China wrestled the new-car sales crown from the U.S. through the first half of the year, topping 6 million cars and trucks at a time when the long-time global sales leader grapples with historic declines.

Do you really think the worlds leaders believe all this BS about green shoots? If they did, would they be plowing money into commodities like this? Or maybe is it, that they know that if you print $13.5 Trillion (and growing) you will see massive inflation of real prices, so they are buying while its cheap and using lip service to keep the dollar value from dropping to preserve as much buying power as possible?

BEIJING, July 10 (Reuters) – China’s imports of unwrought copper and semi-finished copper products in June hit an all-time record for a fifth straight month of 475,999 tonnes, from May’s record 422,666 tonnes, data from the General Administration of Customs showed on Friday.

Rats from a sinking ship

More Diversification out of Dollar…Japan has always been one of the biggest supporters of the USD…and now there is public discussion of diversifying out of it…this is very bearish for the USD (and very bullish for gold)…this may be a prelude to a new ‘basket of currencies’ as an index to a new global exchange currency

July 13 (Bloomberg) — Japan’s opposition party, leading in polls ahead of next month’s election, said the nation should consider shifting its $1 trillion of foreign reserves away from the dollar and buying International Monetary Fund bonds.

The next world reserve currency

President Medvedev has called for a gold backed currency over and over. This time, he isnt just calling for it, he is producing examples of it. He handed coins to the leaders of G8 delegations, a proto-type of a potential new global currency…and these coins were pure gold. Any move in this direction would be extremely bullish for gold. Read an article I wrote regarding shifting to a gold back currency to understand why.

July 10 (Bloomberg) — Russian President Dmitry Medvedev illustrated his call for a supranational currency to replace the dollar by pulling from his pocket a sample coin of a “united future world currency.”

My colleagues have been right so far, having called the current economic crisis over a decade ago. This video proves it: Millennium Money as it was produced in the mid 90’s.

Our portfolios also reflect the fact that those who listened to us over the last few years are doing quite well right now. Those who did not…maybe not so much.

I will be sending out a ‘Rapid Trends Insider’ email later today with an exclusive chance to listen in on a recent round-table discussion with my colleagues regarding the global supply / demand situation, as well as an interview we did with David Morgan, one of the worlds top recognized silver analysts.

You can join our newsletter here: Rapid Trends Insider

By Shanthy Nambiar and Lilian Karunungan

June 8 (Bloomberg) — The BRICs are buying dollars at the fastest pace since before credit markets froze in September, protecting exports even as leaders of the biggest emerging markets consider alternatives to the U.S. currency.

Brazil, Russia, India and China increased foreign reserves by more than $60 billion in May to limit currency gains as the first global recession since World War II restricted exports, data compiled by central banks and strategists show. Brazil bought the most dollars in a year, India’s reserves gained the most since January 2008 and Russia added the most foreign exchange since July.

While Russian, Chinese and Brazilian leaders suggest substituting the dollar, the central bank purchases show just how dependant they remain on the world’s reserve currency. Russia is proposing the BRICs consider creating a new unit of exchange when they meet in Yekaterinburg on June 16. China and Brazil said last month they may look at ways of dropping the dollar for trade between the two countries.

“Foreign central banks do not want to see their currencies relentlessly strengthen,” said Daniel Tenengauzer, head of foreign-exchange and emerging-market debt strategy at Banc of America-Merrill Lynch in New York. “Such a move would dampen an already-weak outlook outside the U.S. and potentially risk even more capital-markets chaos if the dollar appeared to be heading toward a disorderly decline.”

The U.S. currency rallied in Asia today, gaining 1.3 percent against the Indian rupee to 47.74. Russia’s ruble fell 1.8 percent to 31.42 per dollar in London trading, while the yuan’s 12-month offshore forward contract, an agreement to buy an asset in the future, fell 0.5 percent to 6.731.

Real’s Rally

International reserve assets excluding gold held by the BRICs, an acronym coined by Goldman Sachs Group Inc. Chief Economist Jim O’Neill in 2001 for the biggest emerging markets, total $2.8 trillion, a 7.8 percent increase from a year ago and 42 percent of the world’s total, data compiled by Bloomberg show.

The real, ruble, and rupee strengthened and the Dollar Index posted its biggest decline in 24 years last month as signs the global recession may be easing spurred investors to seek higher-yielding alternatives to the U.S. currency. A net $26.1 billion has flowed into emerging-market equity funds this year, EPFR Global, which tracks $11 trillion worldwide, said June 4.

The real rallied 11.2 percent last month, the ruble gained 6.9 percent and the rupee 6.4 percent. The yuan appreciated 21 percent between July 2005, when the government allowed it to trade, and July 2008. China has prevented the currency from strengthening since then as the economy slowed.

Currency Alternatives

The Dollar Index, which tracks the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, lost 6.4 percent last month, the biggest decline since March 1985. It rose 0.9 percent today.

Russian President Dmitry Medvedev proposed on June 5 that nations use a mix of regional reserve currencies to reduce reliance on the dollar. The subject may be on the agenda when he meets his counterparts in the Ural Mountains city of Yekaterinburg, the Kremlin said this month.

China’s central bank Governor Zhou Xiaochuan suggested using the International Monetary Fund unit of account, known as special drawing rights, as an alternative in March. His Indian counterpart Duvvuri Subbarao hasn’t commented on that plan. IMF First Deputy Managing Director John Lipsky said on June 6 it’s possible to take such a “revolutionary” step over time.

Last month, China, the biggest importer of soybeans and iron-ore, and Brazil, whose main exports include soy, metals and petroleum, began studying a proposal to move away from the dollar and use yuan and reais instead.

Dollar ‘Discontent’

“What we are seeing is a public expression of discontent over the dollar, yet nobody knows what needs to be done specifically,” said Elina Ribakova, the chief economist in Moscow for Citigroup Inc.

Brazil, the only country to break down its dollar purchases, acquired $2.8 billion of the greenback in May, Russia bought at least $17 billion of foreign currencies, while India’s reserves rose by $10.6 billion, central bank data show. China may have purchased $30 billion in foreign exchange last month, Hong Kong- based research company SJS Markets Ltd. estimates.

At the end of 2008 the dollar accounted for 64 percent of central bank reserves, up from 62.8 percent in June 2008, according to the IMF in Washington. The currency has underpinned exchange rates since the 1971 collapse of the Bretton Woods system, which linked their value to gold.

Rising Holdings

Federal Reserve holdings of Treasuries on behalf of central banks and institutions rose by $68.8 billion, or 3.3 percent, in May, the third most on record, Bloomberg data show. About 51 percent of the $6.36 trillion in marketable Treasuries are held outside America, up from 35 percent in 2000. China is the biggest foreign owner of Treasuries, increasing its holdings to $768 billion as of March from $60 billion in 2000.

A steeper dollar decline would hurt BRIC exports, devalue their reserves and worsen the global credit crisis, said Mitul Kotecha, head of global foreign-exchange strategy in Hong Kong at Calyon, the investment banking arm of Credit Agricole SA.

“It would be shooting yourself in the foot to sell U.S. assets and move away from dollars too quickly,” said Kotecha. “As much as we are seeing in terms of rhetoric, the central banks have so much exposure they will be very careful.”

Intervention, where central banks buy or sell currencies to influence exchange rates, may help bolster the dollar, he said.

Currency Forecasts

The median estimate of analysts surveyed by Bloomberg is for the real to fall 7 percent to 2.1 per dollar by year-end, while the rupee will drop 0.6 percent to 48. The yen is forecast to weaken 4.4 percent.

“The dollar will stabilize against its major trading partners around the turn of the quarter,” said Michael Shaoul, chief executive officer at New York-based institutional brokerage Oscar Gruss & Son Inc., who called the emerging-market rally in February. “It got stronger than was warranted during the crisis and weakened rapidly during the recovery.”

Investors abandoned emerging markets after the September bankruptcy of Lehman Brothers Holdings Inc. eliminated demand for all by the safest, most easily traded assets, such as Treasuries. The MSCI EM Index tumbled 54.5 percent last year.

A shortage of the U.S. currency forced central banks to pump reserves into their economies. The Dollar Index rose 18 percent between June 30 and March 31.

Reserves Reversal

Asian central banks, excluding China, ran down foreign- exchange reserves by more than $300 billion in the 12 months ended April 30, according to London-based HSBC Holdings Plc. Russia’s slid by $213 billion in the eight months ended March 31, central bank data show. Brazil’s reserves dropped $5.7 billion in the six months ended Feb. 27.

Emerging-market central banks are buying dollars as stronger currencies threaten exports while the global economy contracts.

The IMF estimates the world’s gross domestic product will shrink 1.3 percent this year. Trade worldwide will plunge 9 percent, the most since World War II, the World Trade Organization said in March.

Brazil’s $1.3 trillion economy, Latin America’s largest, may drop 0.73 percent in 2009, the biggest contraction in 19 years, according to the median forecast in a May 29 central bank survey. Russia’s economy will contract at least 6 percent, Medvedev said this month. China’s exports, which account for 60 percent of its GDP, slumped 22.6 percent in April from a year earlier, according to the government.

Dollar Strength

“There might be a risk-appetite reversal which could mean some temporary dollar strength,” said Peter Eerdmans, head of emerging-market bonds in London at Investec Asset Management Ltd., which manages $700 million in developing-nation debt. “We have taken profits on some of our emerging-market positions.”

Brazil’s central bank President Henrique Meirelles said last month foreign currency flows are creating a “very favorable” condition for policy makers to boost reserves.

“Given the breadth and depth of the U.S. economy in relation to the world economy, it is unlikely the dollar will be displaced as the principal reserve currency anytime soon,” said Nikhil Srinivasan, who overseas $20 billion of assets as chief investment officer for Asia and the Middle East at Munich-based Allianz SE, Europe’s biggest insurer.

Original Article

For those of you who dont know, the USD is the world reserve currency, and for decades all world trade has been settled in it.

Governments of the world are not going to stand by until the US fixes it problems, China has been steadily putting the pieces in place to conduct global trade with or without the Dollar.

If using methods of trade settlement besides the dollar becomes common practice, it means further pressure on the dollar downward…which means dollars come home.
MOSCOW (Reuters) – Russia and China should consider switching to domestic currencies in bilateral trade without going to the dollar, Russia’s president Dmitry Medvedev said in an interview with Kommersant daily published on Friday.

China has already entered similar agreements with Brazil and Belarus. The deal involves a currency swap agreement between the two countries. Trade turnover between Russia and China reached about $50 billion in 2008 and is set to increase.

“I think that we can think about such positions, for example the rouble against yuan,” Medvedev was quoted by Kommersant as saying. Russia’s own attempt to switch to the rouble in bilateral trade with Belarus has so far not been successful.

Leaders of Brazil, Russia, India and China, known by their BRIC acronym, are meeting in the Russian city of Yekaterinburg on June 16 to discuss the role of the dollar in the global financial system among other issues.

Medvedev said bilateral currency deals between trade partners ease impact of the economic crisis in an environment when many countries have difficulties tapping international capital markets.

Original Article

CHINA’S revelation that it has been stockpiling gold signaled it may accelerate the diversification of its foreign-exchange reserves as a hedge against the global economic downturn, but it’s unlikely to stop buying US-dollar assets, analysts said.

China has added 454 tons to its gold reserves since 2003, bringing the total to 1,054 tons, through domestic purchases and the refining of scrap gold, Hu Xiaolian, head of the State Administration of Foreign Exchange, said in late April.

It was the first public comment on the top-secret gold holdings in the past six years. The figure confirmed what many gold bugs have suspected for years – that China has been quietly amassing a stockpile of the precious metal.

“The gold reserve increase doesn’t come as a surprise given gold’s safe-haven status,” said Wang Lixin, China manager of the World Gold Council. “It’s especially reasonable against the global financial crisis as China is seeking safe investments. Gold has outshone other assets in the global downturn.”

China is the world’s biggest gold producer. It now ranks fifth in gold reserves, behind the United States, Germany, France and Italy.

“Safety is the priority in forex reserves, and diversification is an effective means to hit your target,” said Hu, who is also deputy governor of the People’s Bank of China, the central bank.

China recently reported the change in its gold holdings to the International Monetary Fund and will include the figures in central bank reports and balance of payment statistics, Hu said.

Gold prices have more than doubled since 2003. In the past year, the precious metal has risen just under 4 percent after dropping to as low as US$712 a troy ounce in November and touching US$995 in February.

“We are closely monitoring developments at other central banks to determine whether they will follow China’s bold leadership move, particularly those in Asia,” said Aram Shishmanian, chief executive officer of the World Gold Council.

Still, gold remains a minor investment for China.

Despite the announced increase, China’s gold stockpile amounts to less than 2 percent of its total foreign reserves, based on gold’s current price of about US$900 an ounce.

The US had 8,133.5 tons of gold at the end of March, accounting for almost 79 percent of its total forex reserves, according to the World Gold Council.

In the eurozone, the European Central Bank has allocated 15 percent of its reserve asset portfolio to gold.

“China will stick to major currencies and high-quality assets when diversifying its foreign-exchange reserves,” Hu said.

World currency

China holds the world’s biggest foreign-exchange reserves, backed by its strong trade growth in the past decade. China’s forex reserves stood at US$1.95 trillion as of the end of last year, up US$417.8 billion from the year earlier.

China managed to make money on its reserves last year despite the financial turmoil, Hu said, but she also noted that returns on foreign reserves slowed in 2008 from previous years against the backdrop of the worst financial crisis since 1929.

Hu said in late March that China will continue to buy US Treasuries but will monitor price fluctuations.

Premier Wen Jiabao said in March that China is concerned about its US-denominated assets, mainly US Treasury bonds, and wanted assurances about their safety.

More recently, China suggested a move toward a world currency system linked to the International Monetary Fund’s Special Drawing Rights.

It was viewed as a move to get away from the greenback’s dominance as a global currency.

Economists said China’s concerns for its US-dollar assets are understandable since the US economy is experiencing a prolonged recession and financial market turmoil. Still, no one believes that China wants to see a major capitulation in its biggest export market.

“These worries are not expected to stop China from accumulating more assets in the US,” said Sherman Chan, a Moody’s economy.com economist. “It is in China’s interest to support the US economy.”

The central government has already announced a two-year stimulus package of 4 trillion yuan, or 16 percent of China’s economy, to bolster domestic growth.

The health of the US economy is crucial to the global environment and has direct implications for international trade, analysts said. A sound recovery in China can’t be achieved without the revival of US demand, they said.

“The longer the US stays in recession, the more stress is felt by China’s exporters,” Chan said. “A US recovery is the only cure for the tumble in exports and manufacturing.

“Knowing that the US government needs foreign funding to implement its stimulus measures, the Chinese have an incentive to get behind the plan,” Chan added.

Based on Standard Chartered Bank’s calculation, the total sum of China’s US Treasury holdings is still rising, though growth in purchases has slowed along with exports and overall foreign reserves.

In the first quarter of this year, China’s forex reserves grew about US$47 billion, compared with US$100 billion a year earlier, Standard Chartered estimated.

“China is not reducing its stock of US securities, but is switching from long-term to short-term securities, or tenures of less than one year,” it said in a recent report.

Stephen Green, Standard Chartered’s head of research in China, said the bank believes another big current account surplus is shaping up for 2009, so he still expects China’s forex reserves to grow by US$400 billion this year.

“US Treasuries are still an investment safe haven. The relatively safer place for China to store its war chest for the long term is certainly the US,” said Chan.

Great article, but I disagree with the authors conclusion:

It’s much easier to spend your money on big-ticket items like entire companies than a few hundred thousand tons of raw material purchases.

Easy does not = smart. Human beings tend to seek the “easy” path more often than not, its in our nature. Easy however rarely translates into success. True wealth comes from labor, and doing what is hard and necessary, versus what is fun and easy.

So it is also with investments and the foundation of wealth – commodities are THE play for the next decade and more, because its not based on paper, and has no counter party risk. To simply buy a company and expect it is a good invstment assumes that the management will do well, and that the markets are not crushed.

Gold has no master and has value regardless of whether a particular CEO is an idiot, or whether the markets are being crushed (or manipulate, for that matter).

April 20th, 2009·