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Here's How China Is Fleeing the Dollar

By Matt Badiali, editor, S&A Resource Report
Thursday, August 6, 2009

If you have massive coal reserves, an oil project in Kurdistan, or a boatload of gold bullion, China wants to talk to you.

The Chinese government holds over $2 trillion in reserves. The dollar is an asset that has lost 33% of its purchasing power since 2002. And with the U.S. government creating boatloads of easy credit with low interest rates, the long-term picture is even grimmer.

Those reserves are a liability, and the Chinese want out. Here's how they're fleeing the dollar...


China's coal imports are 2.8 times what they were last year. As of May, oil imports were up 14%. Imports of iron ore and copper are reaching record highs. And it's not just raw materials...

In February, China Development Bank loaned $10 billion to Petrobras (the Brazilian national oil company), $15 billion to OAO Rosneft (a Russian national oil company), and $10 billion to Transneft (Russia's national pipeline company).

So far this summer, Aluminum Corp of China invested $19.5 billion in giant base-metal miner Rio Tinto. China's national oil company Sinopec paid out over $8 billion for Addax Petroleum's oil fields in Iraq and offshore Africa. And the state-owned China Investment Corp just bought a $1.5 billion stake in metals producer Teck Resources.

China is dumping dollars for all kinds of hard assets and commodity infrastructure. It's also dumping those dollars for gold.

From 2003 to April 2009, China secretly increased its gold reserves by more than 75%. Today, it's the fifth-largest sovereign gold holder at nearly 34 million ounces. That's over 30 times the amount of gold the Chinese government held in 1990.

Right now, that much gold is worth about $32.6 billion – just 2% of China's total dollar reserves. China's frantic to exchange more of its trillions of dollars for gold. But only about $150 billion in gold bullion trades in a given year. The government can't put all its dollars to work in the bullion market without driving gold prices to the stratosphere.

That's why China is pouring resources into its domestic mining industry.

The Chinese central bank buys all the gold Chinese mines produce at a fixed price. In 2007, China produced about 9.7 million ounces of gold – making it the world's largest producer ahead of South Africa, which produced about 9 million ounces. 

China's the world's third-largest country, covering about 3.7 million square miles. That land is incredibly rich in mineral wealth – it potentially holds over 320 million ounces of gold.

Only a handful of public companies are working with the Chinese government to expand the country's production. Those companies will reap huge rewards as China dumps its dollars into its domestic gold industry.

Sino Gold (SGX on the Australian Exchange), for example, is a $1.2 billion China-focused gold miner. It owns two operating mines with two more under construction. The company's remarkable ascent began in 2001, when it acquired a small project called Jinfeng. In just six years, Jinfeng went from a rough one million-ounce resource to the country's second-largest gold mine.

It would be difficult just to permit a U.S. mine in six years, let alone bring it into production.

China's government is so eager to get its hands on more hard assets, it's willing to go to almost any lengths to kickstart its mining industry. That kind of support can yield tremendous returns for smart investors.

Good investing,

Matt

P.S. Chinese-focused gold stocks are a tough group to navigate for inexperienced investors. As you can see with Sino Gold, the single key to picking a winner is buying with the government on your side.

I've pinpointed the four best government-backed investments to buy to make 10 times your money as China modernizes its gold and silver mines.Click here for the details.




Market Notes


CHINA IS BACK IN BOOM MODE

Stocks reaching new 52-week highs roll call: China Eastern Airlines, China Fire & Security, China Automotive Systems, China Southern Airlines, China Telecom, China Life.

In other words, that China boom we told you about is still in full swing.

China is a marketer's dream. Over one billion hard-working people are coming on line in the global economy... and over one billion new consumers of refrigerators, cigarettes, cell phones, cars, and whatever else you could possibly sell.

This "world's greatest growth story" quality often produces awesome rallies in Chinese stocks. For instance, from mid-2005 to mid-2007, the benchmark Shanghai Index soared 500%. That was followed by a 70% bust. But as you can see from today's chart, we're back in boom territory with China. The Shanghai index is up 87% so far this year... and the "new highs" list is full of China.

After such a big run, Chinese stocks are plenty popular and overvalued... so being long here is absolutely a "momentum trade." But what a trade it can be... when China runs, it runs.
 


In The Daily Crux



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