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Catalyst!

By David Vaughn     Printer Friendly Version
July 4, 2005

www.goldletterdv.com

And how is gold performing?

Gold is becoming stronger every day & still hardly anyone notices – or cares.  I am sure you have observed lately that oil has hit 61 dollars a barrel. People do notice oil, but with almost the same amount of indifference.

“How strange gold could have come so far, yet the interest still be so subdued.”  Bill Murphy, LeMetropole, 6-29-2005

We have mentioned before that as the days move forward we will observe resource wars evolve as the mighty nations of the earth begin to seriously compete with one another to acquire rapidly depleting resources.  Japan, in the late 1930s attempted to secure a supply of oil for her Pacific Empire & we know the eventual outcome of that event.

“World War II was fought with oil and for oil, as both Germany and Japan tried desperately to extend their hegemony to distant oil-producing regions to ensure the continuation of their rapidly developed industrial economies.  Both lost the war, in large part, because they failed to secure the oil.” By James Howard Kunstler, The Long Emergency, 2005

And make no mistake that the wars we are experiencing today are a battle over oil. China’s economic power & world influence will continue to grow & weigh heavily against the economic fortunes of the U.S.

"In every age, capital flows from nations with mature economies & excess wealth to nations that require it for development. As China transformed itself from a political & economic backwater into a world power in the late 20th & early 21st centuries, the major river of capital flowed from New York to Shanghai."

Shanghai is considered by many to be the most breathtaking city on earth and is twice the size of New York.  Here more skyscrapers abound representing the sparkling zenith of the commercial transformation of China these last 10 years. China accounts for less than 5% of the global economy, but is credited with 15 – 20% of the world’s economic growth & yes, over 85% of US Treasuries are purchased by Asian central banks.

China today is industrializing their country at the expense of the de-industrialization of the U.S. This is just revenge considering that for over a hundred years China suffered humiliation at the hands of both the United States & Europe.

"Global investors should carefully consider this point. Economic growth could shift from the Western industrial nations to the emerging economies of Asia and the former Soviet Union, and relegate some recent centers of prosperity such as Silicon Valley and Hong Kong to the status of a Buffalo or New Orleans." Tomorrow's Gold, Mark Faber, 2003

Do you think China will hold onto all those US dollars forever or even if they really care if they eventually lose a third or even half of their savings in U.S. Treasuries?

“China spends its dollars on U.S. Treasury securities, and, by doing so, helps keep interest rates down for American borrowers.” “That’s good, right? Not necessarily, says Jeffrey Garten, dean of the Yale School of Management. “IT’S A SWORD OF DAMOCLES OVER THE UNITED STATES. We never want to be in a position where any foreign government has so much influence over our interest rates,” he says.” James Cox, USA Today, 8-11-2004

Sweet revenge planned by the Chinese?

“Asian central banks have purchased so many U.S. Treasury bonds the past two years that they may decide to diversify reserves by buying gold." Joseph Foster, portfolio manager of Van Eck International Investors Gold, By Warren Berry, Chicago Tribune, 10-24-2004

And how significant is this Chinese gold market?

"China is set to triple gold demand over in coming years, up from 200 tonnes, the World Gold Council said Monday." Business Report, 2004

So the Chinese love gold.  What does this mean?  A proper understanding of how significant this Asian gold market is growing can build a confidence for those in the west who still doubt gold’s value.

“A recent questionnaire by the Beijing Gold Economic Development Research center in 10 major cities in China showed 70% of respondents said that they would invest in the gold trade if they had money & over 20% of securities investors would transfer part of their capital to gold trade.” Xinhua, ChinaDaily.com, 12-5-2003

Let’s stop here & examine further the gold trade in China.

“…trading in gold is expected to become a crucial investment arena for Chinese individuals.” Xinhua, ChinaDaily.com, 12-5-2003

But let’s not leave here until we take a gander at the Chinese estimated gold consumption & demand for the next few years.

Let’s go over yearly GROWING Chinese gold consumption:

1999 - 166 Tons
2000 - 175 Tons
2001 - 182 Tons
2006 - 362 Tons (Per World Gold Council Estimate)
2011 - 546 Tons (Per World Gold Council Estimate)

Yes, there is a LARGE demand for gold in China, with some estimates of future annual imports running at 600 – 800 tonnes a year which is quite strong against a 4,000 tonne world market.

So our point here in discussing gold demand & gold development in China?

“Experts predicted that nearly 7.5 million (Chinese) investors will try the gold trade while continuing the securities trade in the future. Calculating that each one will invest 10,000 yuan (about US $1,200) of capital, the trade will attract 75 billion yuan (some US $9 billion) of funds in total.” Xinhua, ChinaDaily.com, 12-5-2003

And now – back to the subject of oil.

"Make no mistake in understanding what is going on," writes our Pittsburgh correspondent, Byron King. "The Unocal takeover effort is a test by the Chinese government of U.S. national will. The Chinese have an energy-based national strategy, and upon it they are acting. You can disregard this at your peril.” Bill Bonner, Daily Reckoning, 6-29-2005

Historians a 100 years from today will write in their texts those catalysts that occurred at the beginning of the 21st century that set the mighty wheels of conflict in motion as nation battled nation to fight for depleting oil. 

“I believe that we face a dire & unprecedented period of difficulty in the twenty first century…” “I predict that we are entering an era of titanic international military strife over resources…” By James Howard Kunstler, The Long Emergency, 2005

Can we observe today a catalyst in the making?

“…China is aggressively seeking to corner a strategic asset, oil, and create its own captive supply.” “For a world still absorbing the emerging force of a newly capitalist China, CNOOC's bid is the clearest sign yet of how China's appetite for resources is reshaping global commerce.” “CNOOC's move underscores the urgency of China's drive to secure new stocks of energy…” By Jonathan Weisman & Peter S. Goodman, The Washington Post, 6-25-2005

The catalyst?

”The takeover bid by China's state-controlled CNOOC Ltd. may have been the clearest sign yet of an emerging economic power's global ambitions…” By Jonathan Weisman & Peter S. Goodman, The Washington Post, 6-25-2005

I am sure you have caught this story in the news this past week.  China is attempting to purchase a U.S. oil company. 

“China's bid for one of America's oldest and most iconic oil companies is not only novel, it is a signal event...it tells us that things have changed.”  Bill Bonner, Daily Reckoning, 6-29-2005

China needs to continue to increase its oil purchases to be able to survive & feed its growing energy needs.  In Canada this past month or so China successfully purchased a stake in Canada’s oil reserves, but will the U.S. allow China to do the same in the United States?

“Some in Congress see the bid as an attempt by the Chinese government to seize American oil…”  "It will become increasingly difficult for U.S.-based companies to compete for scarce energy resources on the world market against China's state- owned and/or controlled energy companies…" By David R. Baker, Chronicle Staff Writer, San Francisco Chronicle, 6-25-2005

Do you see the potential for a serious & evolving catalyst in the making?

China needs to secure energy & oil to feed its growing empire & how is it going to acquire these resources if they are already held by others who have no desire to share their own oil assets.  I believe we are witnessing the beginning & the foundation of a new battle that will grow to take on world shaking proportions.

“Political fears of China's economic might intensified Thursday following China's unsolicited bid to take over a U.S. oil company, with lawmakers from both political parties warning that Congress will take retaliatory action against Chinese trade practices if the Bush administration fails to respond.”  By Jonathan Weisman & Peter S. Goodman, The Washington Post, 6-25-2005

And in my personal opinion I believe as the U.S. intensifies its effort to with hold energy resources from China that the Asian people will view this as the catalyst requiring them to make a stronger stand against the United StatesAs China sees its energy needs challenged they will look into their own arsenal to see what bargaining chips they can themselves deploy in retaliation.

“…Asian oil and gas firms have already made 60 acquisitions worth $2.1 billion so far this year (2005)…” “This compares with 146 deals worth $8.3 billion in the whole of 2004, and 83 deals worth $4.9 billion the previous year (2003), according to data firm Dealogic.” irandaily.com, 4-27-2005

I believe what we are witnessing is China’s effort to cash in some of those US dollar chips it has been accumulating & trading them in for something tangible.  And if China is blocked by the US from doing this China has to ask itself if there is any real value in all those US chips it has been piling up to the ceiling. 

And what ever happened to “free trade” & the concept of “globalism” for every nation?  That concept will quickly evaporate as the oil continues to be depleted. 


"I believe strongly in a free global marketplace. However…” warned Rep. Richard W. Pombo (R-Calif.)

And do you wonder what the Chinese may at this moment be thinking?

"For those who still might not get it, I think that the Chinese may as well be taking out a full page ad in the Washington Post, stating, 'We are going to buy up all of your oil and gas. And to accomplish this task, we're going to use all of those dollars you have been sending us for the past ten years. And just what are you going to do about it?”  Bill Bonner, Daily Reckoning, 6-29-2005

The resource wars have indeed begun!

“While the short-term is hard to figure, the gains to be made from here on in will be even more sensational than those made from 1999 through 2003. You can take that to the bank.”  Bill Murphy, LeMetropole, 6-29-2005

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David N. Vaughn
Gold Letter, Inc.
David4054@charter.net
Gold Letter Website
July 1, 2005

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