Wallace, Idaho – Forgive another rant about China, but this one's kind of important, because if what we heard from a well-placed China guy (WPCG) in Vancouver the other day is to be believed – and he's not in the habit of making things up – North American mining shares are about to rock. The conversation was of a backgrounder nature, so we're not going to toss out any names. But here is the gist of what transpired:
WPCG: China has a problem. What it would most like to do is convert its huge holdings of U.S. dollars and U.S. Treasuries into gold.
WSJ: Then why not start buying gold?
WPCG: We can't. The minute that word gets out that China is unloading all, or any part, of its $1 trillion in U.S. paper to buy gold, the game is up. Two things happen: the price of gold goes to $10,000, and the current value of the U.S. dollar falls to about 10 cents.
WSJ: There are some people in the U.S. who wouldn't mind such a thing happening.
WPCG: Yes, but the perspective from China is different. China has spent 30 years building a trading relationship with the United States, and China needs the U.S. as a trading partner because we need our manufacturing sector to continue to grow and provide wealth to Chinese workers and families. If the dollar falls to the point where the U.S. can no longer afford to purchase Chinese goods, then China will suffer as well.
WSJ: But the current situation is untenable. China can't lend money to the U.S. forever to keep Americans buying Chinese stuff at Wal-Mart, can they?
WPCG: Of course not. But we need to engineer a soft landing for the U.S. economy, one that will not hurt Americans and will not hurt the Chinese people as well. The current situation was created over a 30 year period and it will take another 30 years to correct it.
WSJ: But in the meantime, no gold. What about silver? China and silver go back to the start of recorded history. Couldn't China buy silver to get itself out of U.S. paper? Nobody pays any attention to the silver price.
WPCG: Silver is too small a market. You could buy all the available silver bullion in the world for about three and a half billion U.S. dollars at $10 an ounce. In the course of doing so you'd drive the silver price crazy and China would still be holding a lot of devalued U.S. paper. China is still a poor country – poor in terms of natural resources. We need basic commodities. So we need, naturally, to invest in commodities without upsetting any of the markets unduly. If we were to buy up 5 percent of the world's silver, that would cause problems. If we were to buy up 5 percent of the world's gold, that would also cause problems. If we were to be seen cornering the world's oil market, that would also not be good. And in any case the dollars China holds would be worth less than they are now, and our U.S. dollar holdings have already dropped by $300 billion in terms of real purchasing power over the last couple of years.
WSJ: So you've figured a way out of this Hobson's choice?
WPCG: We have. There are other ways to own resources without owning the physical commodity. And that is by buying resources by buying resource companies.
WSJ: But China tried that with Unocal a few years ago, and a bunch of racists and grandstanders in Congress chased you away.
WPCG: That's right, and that was a difficult lesson for China. A hurtful one. But China could buy 4.9 percent of Unocal, and nobody would have been the wiser. It is not until you buy 5 percent of a company that you have to declare yourself and your intentions to the U.S. Securities and Exchange Commission and go public with that information.
WSJ: So . . . ?
WPCG: Because we want gold, we can buy 4.9 percent of Newmont. or Placer Dome, or Gold Fields, or Freeport, or if we really want to blow our money, Barrick, without consequences. If we want base metals, we can buy 4.9 percent of BHP Billiton or Rio Tinto. We want silver, so we buy 4.9 percent of Hecla, 4.9 percent of Pan-American, 4.9 percent of Silver Standard, 4.9 percent of Apex. China could buy 100 percent of a Pink Sheet U.S. company with good resource values, without reporting the purchase to anyone. That way we convert our U.S. dollars into real assets, and nobody's the wiser. Or the poorer. You get the picture. It's a hedge bet.
WSJ: And the U.S. economy . . .?
WPCG: Stays afloat, and has a soft landing. A 30-year soft landing. That is in our best interest.
WSJ: So neither gold nor silver is going to go crazy anytime soon?
WPCG: They have already gone crazy, but nobody noticed. [He grins.] There will be unforeseen circumstances. But the world needs to understand that China seeks value, not speculation. We are not like you. We have generations to answer to, not quarterly reports.
WSJ: Is there any timetable?
WPCG: Certainly, but I am not privy to it, except to point out the obvious, that it will be later on this year. Resource stocks have never been cheaper. They are acting as though silver were still at $5, and gold at $350. We will discuss all this with you at the Silver Summit in Idaho in September during a pre-conference workshop.
WSJ: So you think this is the bottom for mining shares?
WPCG: We can call the top. Don't you think we can call the bottom, too?
Editor of The Silver Valley Mining Journal