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Subject:
Basket of metals as currency standard, created by China
Nanheyangrouchuan
4/16/2009 5:54:43 PM
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"http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5160120/A-Copper-Standard-for-the-worlds-currency-system.html"
A 'Copper Standard' for the world's currency system?
Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.
By Ambrose Evans-Pritchard
Last Updated: 2:41PM BST 16 Apr 2009
Comments 17 | Comment on this article
China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.
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.
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"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."
Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944.
The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.
If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts.
Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February, and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports - almost half GDP - fell 17pc in March.
While Beijing's fiscal stimulus package and credit expansion has helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50pc.
One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said.
This is slightly disingenuous. China has the world's largest reserves - $1.95 trillion, mostly in dollars - because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits.
The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.
Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a "Copper Standard" as a "Gold Standard".
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Comments: 17
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Everyone wants a switch to smaller decentralized power sources. ie. Wind and solar. It's going to take a whole lot of copper to extend the grid out these wind farms. Also the conversion to an electric economy (autos) and away from carbon fired energy is going to demand huge amounts of copper. Face it.. China leaders= smart long term thinking... US leaders.. not so much.
JJ Fuchs
on April 16, 2009
at 05:47 PM
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$1.9 trillion in reserve! Wow. The U.S. has a $9 trillion debt and rising. Enough said as the financial collapse inches closer.
JackP
on April 16, 2009
at 05:46 PM
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Unlike an equal amount of bonds, ownership of a million tons of copper, will not earn interest. The copper will need a much larger space to store and safeguard it, resulting in greater long term costs. It costs more to transport it between owners, and its not as convertable as a cash asset. And remember rice, corn, and wheat are also commodities that can be traded between nations. Why not base a world currency on them, I have never heard of anyone surviving on a diet of pure copper.
Al
on April 16, 2009
at 04:54 PM
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Our present monetary system is based on promises to pay and is therefore contingent on trust.
When the integrity of a promise starts to be viewed with suspicion, exchanging promises for any commodity (including copper) would appear to be prudent.
JimK
on April 16, 2009
at 04:47 PM
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China invests in a metal that has actual worthwhile uses.
The US, on the other hand, decides to invest all its money in worthless pieces of paper.
john
on April 16, 2009
at 04:38 PM
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Spot on article.
Sadly, the Chinese leader is smarter and stronger than our current President and his minions. Of course it makes sense to move into this commodity and they will use it eventually and produce cheaper then others buying at the current market price. Copper will maintain its value when the 2 trillion dollars printed in the US recently by Obama hits and the dollar value is affected. They may be communist, but they are not dumb!
Steve
on April 16, 2009
at 04:14 PM
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Never mind copper, take Tnungsten, China currently contols about 75% of production in the world. Its needed for industrial tools light filaments. Not a gambling man I would say this "strategic metal" will be totally contolled by China in 5 years from now. Why buy US$, this a better long term hedge, the times of supporting the US$ are over, smell the coffee!
Robert Davies
on April 16, 2009
at 04:07 PM
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This may be a bit premature. China historically has purchased yearly needs before mid-May. If price finds support from China after that, I believe you will be proven correct. Keep in mind that many investors and builders have bid up copper on the hopes of a re-bound that isn't. The floor could fall out of the market suddenly and decisively. Invest at your peril until there is a sustained market for consuming it.
Jeff
on April 16, 2009
at 04:07 PM
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copper woks for them.
dirk alan
on April 16, 2009
at 03:57 PM
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"... Exactly at least copper has some use instead of just looking pretty..."
Actually gold is used frequently in electronics for connectors and shielding. On a global scale last I checked decorative use of gold was a minority on an ounce by ounce basis. Medical use of gold has also risen in the last 20 years.
The human body doesn't seem to mind gold compared to gold's nearest cousin lead. If you want to shield a implanted medical device you could use lead or gold and I would wager gold is the normal choice between the two.
Gold's allure has always been the fact is doesn't tarnish easily unlike Copper, Brass, and Bronze (Although the patina of those three can be just as decorative as the metals without patina.)
Any material that is useful has value dicated by scarcity. Copper I think has more of a risk of scarcity then gold as, on an ounce by ounce basis (or in the case of currency backing, ton by ton) you use copper for wiring, plumbing, etc where gold is used in extremely small quanities in comparison.
Idgarad
on April 16, 2009
at 02:59 PM
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Prescient piece, Ambrose, prescient.
Now that the US tax season is over (???..anything in the DT about "tea parties" in America?) the crocdile can move back into the waters. He's hungry..and opportunities have been missed.
Have been expecting a Red Chinese move on Taiwan, and Obama comes right out of the social milieu that was trained to view Maoism favorably; Obama would do nothing about a Chinese attack on Taiwan, just as Carter and Callahan I suspect would have done nothing to stop a Soviet advance to the Atlantic across Europe (we should be thankful for the alcoholic Soviet lethargy..they missed an opportunity to conquer Europe). Expect an attack by the fall.
Leftists are trained to view favorably anyone adopting a communist banner. This is why Obama is warming to Castro; I expect US recognition and aid within weeks. Putin will probably annex the Ukraine at the same time the Chicoms move on Taiwan; it would make sense.
The idea that the Chinese have figured out that the US is doing hyperinflation to marginalize the US debt is unusually apt. Hyperinflation is the usual communist route to dislocate societies: post-war Central and Eastern Europe. The American Labor Unions can extort pay increases, particularly out of government-owned outfits such as GM and Citibank, so hyperinflation is no real problems, and their experience with thuggery (unionism is just another form of organized crime like the Mafia or the IRA) means they can keep their members in line. No wonder the smart money wants out of the US..but can't figure out where else to go.
A Copper Standard...Hmmmm..still haven't read Thomas Lawson's "Frenzied Finance" about the Big Doings in copper in the US circa 1907, leading to the Panic of that year.
Lastly, sorry folks, but we're still going to have these periodic panics as long as financing is done through the collateralization of debt process. I should prepare a piece explaining why CDO's don't work and how they caused a minor problem in the backwaters of one sector to become clots blocking all the major arteries.
Nathan Redshield
on April 16, 2009
at 02:58 PM
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Decoupling is coming back and any spin can not change the reality: US Corp will have more then Two Trillion US dollars deficit this year and China has almost Two Trillions dollars in reserves. Recent move in commodities markets and flood of news on our Next Big Thing from China confirms interesting thesis in the following article. Resources will become matter of Strategic Reserves, in Lithium space China is as well ahead of the West. Energy Security and Obama's bet on Green Mobility Revolution are not getting along well with most of known Lithium resources in Bolivia or production in China. Rare Earth Elements (REE) are another Strategic Resources for this Next Industrial Revolution based on Electric Mobility solution and modern high tech applications including military. China almost totally dominates REE market. West will need to pay attention to this matter and there is some hope with recent news from Canada, meanwhile China is moving fast out of US Dollar misery and into new bright things making leapfrog in technological innovation and creating Next Industrial Revolution.
link
Sufiy
on April 16, 2009
at 02:58 PM
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"They call it mellow yellow....quite right tooo..."
mike
on April 16, 2009
at 02:45 PM
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The days of financing the U.S.'s parasites(social programs) are rapidly approaching!
Tim
on April 16, 2009
at 02:25 PM
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This is action you also do before a planned military action. You stock pile raw materials so that when you attack, say Taiwan, and you get boycots placed on you, the effect of those boycots are not felt. Just a historical thought.
Ted Cory
on April 16, 2009
at 02:00 PM
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Exactly at least copper has some use instead of just looking preety
Steve
on April 16, 2009
at 01:41 PM
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Mr. Ambrose,
We love it when you write about anything other than on Euro. :-)
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