Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
How to Play Interest Rates in US Real Estate - 20th Aug 19
Stocks Likely to Breakout Instead of Gold - 20th Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 20th Aug 19
WAYS TO SECURE YOUR FINANCIAL FUTURE - 20th Aug 19
Holiday Nightmares - Your Caravan is Missing! - 20th Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

China's New Commodity Hoard

Commodities / China Economy Jun 12, 2009 - 02:24 PM GMT

By: Jennifer_Barry

Commodities

Best Financial Markets Analysis ArticleIn April, China announced that it purchased 454 metric tons of gold over the past six years. However, gold isn’t the only metal the Chinese have been buying. According to Michael Gaylard of Freight Investor Services, “They are building up some stockpiles right across the commodity spectrum, from base metals to coal.”


China is taking advantage of the low commodity prices to scoop up bargains. The nation has been buying so much copper that the market slipped into a deficit in February, drawing down stockpiles, as average mine utilization fell 9%. Iron ore imports were up 33% in April, to a record 57 million metric tons. Chinese purchasers visited Mozambique in May to lock in deals for base metals like aluminum. The nation just finalized a $9 billion deal with the Democratic Republic of Congo to develop copper and cobalt mines in exchange for infrastructure projects like roads, schools and hospitals. Recently thwarted in its attempts to invest in Rio Tinto, China has reached an agreement to acquire an Australian miner, Oz Minerals.

In addition to coal, China is assuring its access to adequate energy supplies. The nation increased its oil imports 13.6% in April. The government also awarded a US$25 billion loan to two Russian energy companies to lock in 300,000 barrels of crude per day for 20 years. This is part of the Chinese strategy to increase its crude stockpiles from about 30 days of use to 90-100 days supply.

China is not neglecting its need to secure food stores, either. The official Xinhua news agency is citing  experts who recommend the nation accumulate 50 million metric tons of soybeans. The Chinese are purchasing tons of soybeans now, to try to avoid end of crop year rationing. Stockpiles are expected to run very low before the new crop is harvested in the fall, as Argentina’s harvest was much smaller than expected. Much higher prices are anticipated this summer.

Although soybeans have gained more than 46% since March, there is still room for appreciation. As of two weeks ago, Chinese soybeans cost more than $2 per bushel more than U.S. beans, so the backhaul and arbitrage makes it worthwhile to import this essential foodstuff.

I predicted tight supplies and Chinese purchases in my essay A Growing Problem, which was published on  several financial websites in December. That week, we saw a bottom in the grain complex, and the beginning of a robust rally in the CRB.

The Move to Real Assets

Readers of lemetropolecafe.com are already aware that back in April 2006 I formulated and publicized a theory that China was quietly shifting from dollar-denominated Treasury assets into commodity stockpiles. Their targets included especially copper and other metals, but also agricultural commodities. Peter Rhalter on the Café christened it the “China Hoard Theory.”

Through the years I have uncovered additional data to support my theory. I detailed the rotational model the Chinese use to purchase metals on the London Metal Exchange, allowing inventories to build and the price to fall. Once the commodity was cheap again and inventory was plentiful, China would rotate back to purchasing that metal. I articulated the backhaul shipping mechanism they used to cheaply ship heavy commodities back to China on the return voyages of ships loaded with consumer goods.

China’s public acknowledgement that it had secretly built gold reserves has opened eyes. This has now spurred important voices in the financial world to align with the China Hoard Theory, acknowledging a broader Chinese strategy to get out of the dollar and into real assets. The Royal Bank of Canada stated that “China is stockpiling commodities such as copper and iron ore as part of a reallocation of its sovereign wealth amid concern that the value of its dollar assets may decline.” In April, Ambrose Evans-Pritchard realized the folly of China's vendor financing with its customer America in a severe economic downturn. Also that month, Jim Puplava and Puru Saxena analyzed the Chinese desire to exchange paper promises for shrinking supplies of depleting minerals. Having correctly called China’s commodity strategy years ago is a great triumph for me as an analyst.

Other pundits have deprecated the commodity rebound, claiming that China is just spending stimulus money that will soon run out. However, I think this uptrend is more than an aberration. Instead of “green shoots” in the U.S. we are seeing bamboo shoots in Asia. Even with China having its worst year since 1992, its first quarter GDP grew 6.1% year-over-year, a strength other countries envy.

Industrial production was strong last month as well. Zapata George Blake notes that tire plants in China are running full shifts - a leading indicator of a rebound in auto manufacturing. This will continue to boost the price of related commodities like palladium, which made a recent high of $262, up 45% for the year.

Other measures corroborate a recovery in China. The CRB Index is up nearly 32% since its lows in December. The Baltic Dry Index, a measure of global shipping demand, reached 4,291 this week, more than six times its December low of 663, but still less than half its 2008 high. It smashed its 200 day moving average to the upside, and went nearly parabolic before correcting. This indicates higher demand as well as some loosening in the credit markets.

The resurgence in these indices, and the rise of U.S. stock markets on poor fundamentals is also signalling a resurgence of price inflation. The world’s central banks can’t flood the globe with liquidity in a move they euphemistically call qualitative easing without pushing the cost of goods much higher. The Federal Reserve is the globe’s worst offender in this area, swapping banks’ toxic assets for Treasuries which these financial institutions can use as collateral for other risky deals. With banks deemed “too big to fail,” the taxpayer is on the hook for any further losses, and the regulators do little to rein in excesses.

I believe that hyperinflation is sadly inevitable, so it’s wise to copy the Chinese. Make sure you have a heavy weighting in the precious metals, the safest assets of all. Then swap your excess dollars for real assets like nonperishable food and other necessities. Avoid leverage in all commodity investments, as the volatility can cause big losses if you are on margin.

by Jennifer Barry

Global Asset Strategist

http://www.globalassetstrategist.com

Copyright 2009 Jennifer Barry

Hello, I'm Jennifer Barry and I want to help you not only preserve your wealth, but add to your nest egg. How can I do this? I investigate the financial universe for undervalued assets you can invest in. Then I write about them in my monthly newsletter, Global Asset Strategist.

Disclaimer: Precious metals, commodity stocks, futures, and associated investments can be very volatile. Prices may rise and fall quickly and unpredictably. It may take months or years to see a significant profit. The owners and employees of Global Asset Strategist own some or all of the investments profiled in the newsletter, and will benefit from a price increase. We will disclose our ownership position when we recommend an asset and if we sell any investments previously recommended. We don't receive any compensation from companies for profiling any stock. Information published on this website and/or in the newsletter comes from sources thought to be reliable. This information may not be complete or correct. Global Asset Strategist does not employ licensed financial advisors, and does not give investment advice. Suggestions to buy or sell any asset listed are based on the opinions of Jennifer Barry only. Please conduct your own research before making any purchases, and don't spend more than you can afford. We recommend that you consult a trusted financial advisor who understands your individual situation before committing any capital.

Jennifer Barry Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules