Monday, April 20, 2009

The copper medal 

When I posted last week about the lack of Chinese enthusiasm for U.S. Treasuries, I thought it might indicate poor performance of the Chinese export sector. But perhaps they're doing fine with exports and buying something else. What could it be? An alum sends me a note that it could be metal:
Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."

"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.

The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).

While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.

John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."

Those alarmed by the suggestion of a new world currency should relax. This Chinese behavior simply reflects a preference long held in Asia for metals other than gold. After the US and Europe moved towards gold monometallism in the 1870s, only China and India remained on a silver standard -- the loss of demand for silver moved its price to gold from around 16-to-1 (the legal standard) to near 30:1.

There is in fact nothing sacrosanct about the current fiat dollar standard even in the Constitution. A switch to a gold standard, a bimetallic standard or any other metallic standard -- which in essence makes the dollar's value a promise of government -- has been part of the U.S. history since the Coinage Act of 1792.

As for the Chinese, their behavior was well-described as being diversification. Loose money, if it leads to inflation (eventually), is often hedged by holding industrial metals.

Labels: ,