Fahrenheit Oil and Gold: China & the Final War for Resources
In their 1999 seminar treatise entitled, Unrestricted
War: China’s Master Plan to Destroy America,
Colonels Qiao Liang and Wang Xiangsui state that in order
for China to become a dominant global power over the United
States, “The Final War over Resources”, must be
Though this could be easily blown off as People’s
Liberation Army hyperbole, a closer look at the facts shows
us that the United States is in a very vulnerable position
on a number of fronts with China. And so with it, is the U.S.
As long time readers of the OI news know, the
resurgence of gold and the fall of the dollar have a multiple
factors working together. Going forward into 2005, China’s
“final war for resources” will be a key factor
in the further depreciation of the greenback.
The U.S. government has been keeping a lid on
the brewing problems with China because of the delicate situation
which has the Chinese central bank holding billions in U.S.
dollars and treasury bonds which Washington fears they might
China has been instrumental in helping the U.S.
government bank roll its deficit and consequently, this reliance
on the Chinese to support the U.S. debt has the government
up against a rock and a hard place. This problem is made worse
each day by the huge trade imbalance favoring the Chinese
The U.S. dollar reserves of China’s central
bank soared 271% to $449 billion from 2000 to April of 2004.
And while they have been filling their coffers with the greenback
their balance of trade with the U.S. is also building. The
trade deficit with China last year was a record $124.1 billion
and this year, it’s increased a further 28%.
Meanwhile, the United States is financing its
ever ballooning budget deficit, which is projected officially
to be $521 billion in 2004.
Zhu Min, general manager and advisor to the
President for the Bank of China was quoted in the China Daily
earlier this year saying that: “The United States is
benefiting from China using its trade surplus to buy U.S.
Treasury paper as a reserve currency, along with other Asian
nations. But in the long run, this is not sustainable....
China will focus more and more on domestic demand, which is
growing fast. Then we won't be able to finance the U.S. deficit."
And now that’s what’s happening.
China is reportedly selling off their hoard of U.S. dollars
to help build their much needed infrastructure and spend heavily
to secure global resources.
A United Nations report points out that China’s
recent prosperity has raised the living standard of 160 million
Chinese who once existed in poverty. Behind them are another
800 million who are awaiting their turn to live a life once
thought unattainable. The demand of goods and services from
this group means an even greater global demand for resources.
The desire of China to tie up resources has
been evidenced by China Minmetals Corp. who had been in exclusive
talks with Noranda, one of Canada’s largest mining companies,
in an attempt to buyout the company for an estimated $7 billion.
There was tremendous opposition to this plan
however. Canadians argued that the Chinese government’s
strategic interests in securing mineral supplies, and its
management methods, could be contrary to the interest of Noranda,
its workers, and the communities where it operates mines and
Some opponents to the deal also cited U.S. Congressional
hearings that alleged that Minmetals has profited from forced
labor from Chinese prisons.
But this is only one bid of many which has China
trying to lock up global resources.
Very troubling for the United States is the
fact that China has negotiated a new oil supply deal with
Iran which would see Iran receiving both arms and cash. China
has long standing alliances with Iran and is searching for
new energy reserves to drive its booming economy. This new
deal with China is not only an agreement to buy oil and gas
from Iran but also to develop Iran’s Yadavaran oil field.
After this field is developed, Iran will export 150,000 barrels
of crude per day to China. This agreement has been valued
at $70 billion.
China’s demand for oil outpaced its supply
capabilities in 1993. China is now the world’s third
largest importer of crude after the U.S. and Japan and their
demand is growing. From January to October, China imported
99.6m tonnes of crude oil, exceeding the 91m tonnes imported
in the whole of 2003, said reports quoting the General Administration
of Customs. Imports of crude oil in 2004 are expected to reach
120m tonnes, the second largest in the world after the US.
Demand for electricity is also on the rise in
China. Despite record production of coal and a 15% rise in
power generation over the first 10 months of the year, dozens
of Chinese cities suffered brown-outs during this past summer.
And this winter it looks like many will be left without heat
for extended periods. The China Daily reports that Beijing
has only 50% of the coal it needs this winter, while Jilin
has stores of 40%, half the level of this time last year.
So the multi billion dollar question is what
happens when China starts selling U.S. dollars to help expand
their infrastructure and secure their resources?
Well you’re already seeing it. Interest
rates go up, the dollar goes down, and gold takes flight upwards.
Not to mention upward pressure on oil, gas, coal, copper and
other key commodities.
The implications of this fact are staggering.
And demand for commodities will be overwhelming. Insightful
investors who can see this trend and position themselves now
in growth oriented equities holding gold, oil, copper and
other key commodities will be sitting pretty if a few years
time and will have weathered the U.S. dollar collapse better
This is the hugest threat to the U.S. economy
right now yet it’s hardly ever mentioned by the mainstream
Given the strong economic growth of China and
the uncertain purse strings it holds on U.S. dollars and treasury
bonds, I can’t help but wonder how this might tie in
with their aggressive militaristic actions lately.
Last week a Chinese nuclear powered submarine
cruised into Japanese territorial waters in an apparent test
of Japan’s will to enforce its own sovereignty. At stake
here are under water natural gas riches in the East China
Sea very close to the border of Japan’s economic zone.
The government of Japan is worried that China may try and
tap into gas pools within their jurisdiction.
One fact which doesn’t sit well with the
Bush Administration is that U.S. intelligence reports claim
China’s military provided training to both the Taliban
and al Qaeda. Though U.S. officials are at a loss to explain
why the Chinese provided this training some analysts believe
it was an attempt to gain influence over these terrorist groups.
Given China’s need for commodities, its
human rights offenses, and their hawkish military actions
one must wonder if the Chinese government really has a detrimental
agenda for America.
The writings of People’s Liberation Army Colonels Qiao
Liang and Wang Xiangsui, state that the aggressor nation
“must adjust its own financial strategy, use currency
revaluation or devaluation as primary weapons, and combine
means such as getting the upper hand in public opinion and
changing the rules sufficiently to make financial turbulence
and economic crisis appear in the targeted country or area,
weakening its overall power, including its military strength.
Whether it be the intrusions of hackers, a major explosion
at the World Trade Center, or a bombing attack by bin Laden,
all of these greatly exceed the frequency bandwidths understood
by the American military..."
U.S. dollars and U.S. bonds are under pressure.
The budget and trade deficits are hitting new highs on a regular
basis. The U.S. economy is in an unbelievable no-win situation
where the Fed is damned if it raises interest rates and damned
if they don’t. This situation is unsustainable and it’s
unrealistic to believe their will be a painless solution.
It’s a given that China needs more of
every commodity. To what means they will take to get them
remains to be seen.
Regardless of the unknown factors, the
facts we are aware of support the premise that in order to
protect yourself, diversification into gold, oil and other
key commodities makes good sense not only to profit but help
keep your wealth intact in the face of a depreciating dollar.
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