I found this article from the Telegraph interesting. China is buying metals, a lot of them, copper in particular. The thought is that they are looking to protect themselves from dollar dilution as we print more dollars to cover the current economic crisis. From China's point of view, it is a smart move to make.
Thursday, April 16, 2009
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I disagree that it is a smart move. Metals, including precious metals, are just a commodity like any other. Their value is determined by the market, by production, mining, and so forth. Other than not spoiling and being easy to store, it is hard to think of the advantage investment in metals has over other commodities.
To invest in any commodity is to gamble that you can predict its future value better than the person selling them to you can.
Nonetheless, it is interesting. The Chinese must be thinking that copper is relatively cheap today given the future market demands it expects for copper.
Perhaps the Chinese currency has been increasing in value lately relative to other currencies - especially the dollar. If so then it would make a range of commodities relatively cheap for them right now.
I suspect they simply see copper as a safer, long term way to diversify over their current heavy dollar based holdings. It has myriad practical uses, is a relatively stable commodity and does well when paper is doing poorly. There is no denying that they are feeling exposed with the huge investment they hold in treasuries and other dollar holdings, precious metals (in appropriate proportion) are a useful balance against that exposure.
RBR, when the peg against the dollar was lifted in July 2005 the rate dropped from about 8.3:1 to about 8.1:1. Since that time it has fallen to 6.7:1 while maintaining a fairly consistent valuation aganst the Euro. My cheap bowl of street noodles is getting expensive!
Chinese companies, mainly state owned, are in the process of making large bids for Australian resource companies. Up until the global financial bust they were paying out the nose for iron ore. Given the current relative strength of the US dollar and the potential downside to the US Treasury and other western countries printing money, plus an ongoing domestic demand for raw materials, in what way isn't it smart? A commodity that doesn't spoil, is easy to store, you are going to need anyway, you can use to hedge against future price spikes and simply store when prices are low, and has intrinsic worth that is not controlled by another country.
If tomorrow a huge copper deposit is found, the value of copper goes down. If a way is found for a cheaper metal or synthetic fiber to be used in place of copper, its value goes way down. The only reason to buy you copper you don't need now is that you think its value will go up in the future.
Anybody else notice the change to the 2009 penny, by the way? It's got an ugly facsimile of a log cabin on the back. I guess Lincoln was born in 1809, so it was necessary to mess with the coin.
If only it wasn't something so timid as a log cabin. How about in big bold letters: HE SAVED THE UNION AND BROUGHT LIBERTY TO THE DARKEST CORNERS OF THE LAND
Speaking of the darkest corners of the land did you hear that the Governor of Texas got over stimulated at one of those FOX News tea parties and hinted that Texas should secede from the Union if "Washington" (by which he apparently meant Democrats) doesn't start listening to "the people" (by which he apparently meant conservative, Christian, white - mostly male - people).
Gov Perry apparently has said that "I think it's a great Union. There's absolutely no reason to dissolve it." That's like saying to your neighbor, "You've got a great house; I'd never burn it down." It implies you could or might under other circumstances. The union is indivisible, just like Gov Perry says every time he recites the pledge of allegiance, which we know all right-wingers love to do.
LTG if a huge vat of copper is found, yes the price goes down, but that is unlikely and takes a long time to bring to market. A cheaper/better metal doesn't exist for conducting large amounts of power. Synthetic: again takes ages to get to market.
But you are right: the only reason to buy copper is if you think the price will go up in the future. And if you think the value of the US dollar will go down in the future and you are exchanging dollars for copper, that amounts to the same thing
I'm reminded of a classic Monty Python sketch where two mafiosi are talking to a general.
"Nice army base you got here, general....it'd be a shame if caught fire."
I'd point out one line from the article: the one about hybrid cars. The batteries require copper and China is supposed to be the cheap producer of those. China isn't buying metal just for the value, but for the possibilities of use. I don't think it is an unwise move on their part at all.
I reckon China are being smart buying copper too - yes, a previously unheard of vast supply of copper *could* be found at some point in the future, but a previously unheard of vast supply of US dollars has *already* been found...
Hybrid cars - good pick USWest - sounds reasonable to me.
Right, they need copper and their currency's value makes it a bargain right now. Having a strong currency is like having a fire sale on commodities.
Having a strong currency is like having a fire sale on foreign goods, including commodities, real estate, bonds, bordeaux futures, and the like. It is somewhat old-fashioned and of a mercantile-era mindset to stock up on raw materials like this.
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