Minyan Mailbag: China
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
Prof. Succo -
I hope all is well in New York.
I had a question regarding your recent article, Subterfuge. You mentioned that the Chinese would be hurt in a Yuan revaluation, but the rise in gold would help offset the pain.
The US has 60% of its reserves in gold, but China only has 2% (could be a little higher by some estimates). To bring China's reserves up to just 15% in gold would require an addition of 4,500 tonnes - about 2 years worth of world mining production. I guess I just don't see how a rising gold price would help China much in its current state. Wouldn't a rising gold price help those (US & France) that held the most gold?
Now if China were to begin purchasing call options in the form of mining companies with high embedded optionality (i.e. HMY) - things could get interesting. One could argue China is doing just this (with copper) with their recently announced acquisition of Noranda.
Harmony has approx 2,000 tonnes of proven reserves, but also has 14,725 tonnes of "non-proven" reserves that might become proven at higher prices. This would go a long way to boosting China's reserves...especially when HMY trades at a market cap of $4B USD. Would be even more attractive if HMY gobbles up GFI.
The U.S. has very little foreign currency reserves (the definition of a trade deficit), so even though the 60% number may be right (although the government has become so secretive of this that no one really knows), it really doesn't matter much.
You are correct about China: most of its foreign currency reserves are in dollars currently for obvious reasons. The thing that is important though is what is happening now at the margin. China is beginning to (and the point of the article was that they may continue more aggressively) spend those dollar reserves on commodities and infrastructure. The point of the article was to think a few years hence about the possibilites of "what could happen" and that we are not positioned to deal with it.
In my mind the markets discount many events and scenarios, changing probabities constantly. We have to think the same way.
As far as Harmony Gold (HMY:NYSE) I agree fully. The funny thing is that we have been seeing large call buyers in the stock; not very smart buyers as they were buying them with the stock much higher. But that actually would fit if the buyer was a large strategic buyer not sensitive to price being that they have much to buy and possibly were not privy to the company's actions toward Gold Fields (GFI:NYSE).
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