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Friday, February 18, 2011

A Cheaper Dollar Will Open The Door For These Chinese Investments (UUP, MUB, TCK, CCJ, GMO, PWR)

On January 18th and 19th, the top officials of the two most powerful  nations on Earth are to meet in matters of far reaching significance.   There will be not one but two dinners.  One is to be a grand dinner  of state with all of the military and business leaders of both sides in  attendance.  The other is to be an “intimate” dinner.  Oh, to be a fly  on the wall of that private meeting.

Behind the photo-ops and the speeches there is one basic reality,  China and America are joined inseparably at the hip in a single entity,  which I am calling “The Chinamese Twins.”  As in all such pairings each  head can have their own separate and distinct personalities.  The fact  remains you can call one capitalism and the other communism, but both  heads are mutually dependent on a single life support system.  The world  financial network provides circulatory nourishment to both heads whose  interests are complementary.
Washington needs the cheap dollar (NYSE:UUP) to pay off colossal  debts.  China needs to revalue its Yuan to counter domestic inflation in  such areas as food and basic consumer goods.  The Chinese have raised  interest rates and bank reserve rules, to little avail.  At the same  time the Chinese do not want to dry up credit which would impede their  growing economy or slowdown exports.
A current headline in the Wall St. Journal reads, “The Bank Of China  Moves to Make Yuan a Global Currency.”  This will come as no surprise to readers.  In an article I wrote back in November, I spoke about China and Russia beginning to trade in Yuan and Rubles causing the need for the Yuan to be revalued higher.

The Chinese economy is thriving and they can well afford to revalue  the Yuan higher.  This stronger yuan will make North American resource  assets cheaper and put China in the driver’s seat to control many of the  large undeveloped assets.  At the same time they are buying gold,  silver and uranium assets hand over fist to hedge themselves from a U.S.  dollar decline, in which they own the largest interest.  In 2009 the  Chinese Investment Corporation, a state owned company, took large  ownership positions in Teck Cominco (NYSE:TCK) and Penn West Energy  Trust (NYSE:PWR). Recently in June, China National Nuclear signed a  contract with Cameco (NYSE:CCJ) to supply 23 million pounds of uranium.   Hanlong Investments took a large stake in General Moly (AMEX:GMO), one  of the leading North American molybdenum developers.

They want more  gold and silver to support the Yuan in order to ensure that when the  Yuan becomes the major world currency, it will be more resistant to the  swings encountered by fiat currencies.  Additionally, they also want  more precious metals to buttress its fiscal balance sheet and what they  feel is the eventual replacement of the U.S. Dollar as the world’s  reserve currency.  They are also rapidly developing and modernizing  increasing their use of uranium, potash, molybdenum, rare earths, coal  and oil and gas.

By revaluing the Yuan higher, China will be able to control inflation  and rising costs.  A higher Yuan will also benefit the Chinese  investment side which has already been active making deals in North  America.  The U.S. dollar will significantly be cheaper for the Chinese  which would allow them to acquire North American assets for pennies on  the dollar.  Just recently the Chinese Investment Corporation, whose  focus is to look for investment opportunities abroad opened its first  international branch in Toronto, which is the North American epicenter  of resource  companies.   Its one billion plus people can enjoy more  purchasing power through a higher yuan and a higher standard of living  with a supply of North American natural resources which could fuel their  rapid development.

Beyond the blustering and posturing at these dinners the trade off is  that they want carte blanche to enter more strongly into the heart of  capitalism and the North American resource sector.  Here the Chinese can  get all the gold, silver and natural resource deals they want.  Doors  will quietly swing open and everyone will go home happy.  The Chinese  will have their desired access to buy gold and natural resource stocks,  while The Americans receive a weaker dollar with which to pay off their  burgeoning debts.  If you are thinking that such a Byzantine arrangement  can’t be done, be assured it has all happened before.  During the  1980’s the USSR sold large amounts of gold secretly in New York.  It  took three years to become public knowledge.

Another part of this “Chinamese” agreement concerns rare metals, on  which the Chinese head wants to maintain its strategic grip of over 95%  of the world’s supply.  I feel the U.S. will not make this an issue.   The U.S. will accommodate China in order to persuade them to raise the  Yuan higher and the dollar lower.  I feel this revaluation will be done  in a series of two or three steps in 2011, which should eventually move  precious metals into new high territories and crush the U.S. dollar.   Volatile sell offs in gold and silver like I predicted in November and  December, which we are currently experiencing now, may present long term  precious metal investors with buying opportunities.

Underneath all of the media hype and adversarial stories between  China and America, I read a front page story in the New York Times of  1-17-11, “GE To Share Jet Technology With China In A New Joint  Venture.”  Expect to hear more deals in 2011 in which the Chinese  continue to invest in natural resource assets in North America, while  the U.S. continues to search for a way out of the financial  crisis.   

  We may see further bailouts from the federal government as  many states are in danger of defaulting.  The bankrupt states are  already asking Washington for assistance.  This devaluation of the  dollar that Geithner and Obama are asking for is to help the US pay off  its debts and be able to raise its debt ceiling with cheap devalued  dollars.  This should be bullish for precious metal prices where  investors will seek shelter from soaring government deficits and a loss  of the U.S. dollar as the world reserve currency.  See the iShares  S&P National AMT-Free Muni Bond ETF (NYSE:MUB) chart below:

Disclosure None

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