Major breakthrough in the Commodity Carry Trade
Today's Financial News - Posted September 21, 2009
The G-20 is set to meet later this week. Already we are hearing rumors of some big news and huge deals coming from the event. Gold bugs had better pay attention.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): This is a make-or-break week for gold prices. With an ounce of the precious yellow metal once again hovering at the critical thousand-dollar mark, investors are eagerly awaiting the markets next move.
Chances are it is going to be a big one. Here’s why.
It was no surprise when the International Monetary Fund (IMF) announced its plans to unload 400 tonnes of its gold holdings earlier this year. In a time filled with economic woes, the global lender needs the cash to issue new loans and shore up its own balance sheet.
The big surprise is who may be purchasing the gold.
The latest market rumors have China at the head of the line to purchase the $13 billion worth of gold the IMF is ready to unload. If it happens, the move would equate to about one-third of Beijing’s current holding.
It is a major breakthrough in proving the efficacy of the Commodity Currency Trade.
If you have been paying attention, you know China is no stranger to the gold market. Since 2003 – when it last reported its position – to earlier this year, Beijing increased the country’s ownership from 400 tonnes to 1,054 tonnes.
With some $2 trillion in foreign currency reserves, China is quickly securing its assets with an asset greatly removed from political and economic risk. So far, no government has figured out a way to print more gold, but they sure can print more money.
I’m talking about you, Uncle Sam
Later this week, when the twenty largest economies gather in Pittsburgh to discuss the world’s financial health, one subject that will undoubtedly be a hot topic is China’s expansion in the commodities market, especially the gold market.
If news breaks of a major Chinese gold purchase (even if it happens at a major discount to the market), look for a strong bull run over the next several months. Gold hitting the $1,250 per ounce mark would be the next destination.
If you have been following what I have dubbed the Commodity Carry Trade you know China is on a tremendous buying spree of any hard asset denominated in dollars.
A sudden concentration on gold will have several detrimental effects on the domestic economy.
First, while China has a huge stockpile of American dollars to exchange, it is not an unlimited fund. Every dollar Beijing spends on gold is a dollar less it can hand Tim Geithner and his Treasury Department.
With less incentive to buy American debt, interest rates will naturally rise. That’s bad news for an economy unwilling to grow even with ultra-low loan rates.
The lone piece of good news (even it is a bit of a stretch), is the equities market will tag along with the interest rate increases. Unfortunately, so will your bills and the price of everything you buy.
There is no doubt China is moving its assets to the commodities market. We have proven it over and over during the past several months.
The big question now is how fast is China making the move? We will find out later this week.
Pay attention to the news. It is getting very interesting.
Next Article: HSC takes 30% gains on Enzo Biochem (ENZ)
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