Chinese USD Diversification Continues: First Euro Bonds, Now JGBs

Monday, May 30th, 2011

by ZeroHedge.com

Even as the peanut gallery debates whether or not the dollar is the reserve currency of choice for the world, China continues to diversify away from the USD. After last week’s news that Beijing had not had enough of Portuguese bonds, in a repeat of the same scenario from January 2011, and was preparing to bid up Eurozone bonds across the curve (aka double down) we now learn that China, or rather third-party London-domiciled banks doing its bidding, is now the actor behind “massive Japanese bond buying” seen over the past month. Per Reuters: “Foreign investors have flocked to Japanese government bonds in the past five weeks, finance ministry data shows and market sources say China was among the main buyers, although a large part of buying was made through banks in London.”

That said, even Reuters appears unable to get its story straight: “Foreigners bought a net 4.696 trillion yen ($57.7 billion) of Japanese bonds in the five weeks to May 20, a record amount of purchases for any five consecutive weeks since data began to be compiled in its current form in 2005. One source said China appears to be buying the four to five-year sector after having sold a large amount of short-term bills earlier in the month. But other sources said foreign investors, including China, were buying long-dated bonds with less than one year left to maturity, effectively the same as buying short-term bills.” Wherever in the curve China is focusing, the fact that it continues to actively buy JGBs after 5 consecutive months of declines in its UST purchases (coupled with the news broken by Zero Hedge that Fed custodial accounts of foreign UST holdings suffered the largest one week drop in almost 4 years) is sending a very clear political message to the US. One that certainly got some airplay when the Treasury once again declined to brand China an FX manipulator, despite rhetoric out of very brave Geithner at the first possible opportunity this week, that China is precisely that.

More from Reuters:

One likely trigger for the shift to the short-term yen market is the fall in yields for dollar government bills since April.

The foreign binge on Japanese government bonds started in the week of April 18-22, shortly after a squeeze in U.S. bills pushed U.S. bill yields lower.

A new deposit insurance rule sparked a torrent of buying in government bills, pushing the U.S. three-month T-bill yield as low as 0.01 percent in early May and below Japanese government bill yields.

The yield spread between the two countries widened to around 0.09 percentage point in early May although it has since come back to around 0.05 percent.

Then came a sharp fall in the euro, which may have also prompted investors to move funds to the yen.

“As the euro started to suffer from debt problems again, some reserve managers could have shifted some of their euro-denominated to assets to the yen,” said Makoto Noji, senior strategist at SMBC Nikko Securities.

This was similar to last year when China’s foray in the short-term yen market coincided with worries about Greece’s ability to pay back debt.

But China quickly moved out of that position, selling a large amount of yen bills in August to take profits after the yen rose. Market players said at that the time China was unlikely to keep a large amount of funds in the yen because yields were low.

Slowly China is realizing the joy of an interlinked fiat world: at best it can rotate out of one insolvent regime into another. The bottom line is that all regimes are insolvent. So the only question is whether or rather when, just like back in April 2009 China dropped the bomb that over the past 6 years it had accumulated secretly 454 tons of gold, will China announce that while it has been rotating in and out of paper, the ultimate source of its $3 trillion in USD reserves will be non-dilutable commodities which handily double up as currencies.

Tags: Airplay, Banks In London, Consecutive Weeks, Custodial Accounts, Declines, Diversification, Euro Bonds, Finance Ministry, Foreign Investors, Geithner, Japanese Government Bonds, Manipulator, Market Sources, Ministry Data, Peanut Gallery, Political Message, Reserve Currency, Reuters, Term Bills, World China
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Gold Market Cheat Sheet (April 25, 2011)

Sunday, April 24th, 2011

Gold Market Cheat Sheet (April 25, 2011)

For the week, spot gold closed at $1,504.13, up $17.43 per ounce, or 1.17 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 3.24 percent. The U.S. Trade-Weighted Dollar Index slid 0.97 percent for the week.

Strengths

• After S&P lowered its rating outlook on the U.S., the gold price surged early in the week and reached an all-time high of $1,507 per ounce Thursday on a weak jobless claims report.
• The University of Texas Investment Management Company, which manages the endowment for the Texas teacher’s pension fund, has placed 5 percent of its assets in gold bullion.
• What is significant about this purchase is that the buyer has taken delivery of the physical gold into its own custodial accounts versus relying on an intermediary to hold the bullion through a paper claim on its behalf. This represents a purchase of $1 billion of gold bullion and makes a strong statement about the seriousness of pension funds treating precious metals as a legitimate asset class.

Weaknesses

• Negotiations for higher electricity prices are nearing conclusion, as Zambia expects to agree on higher electricity prices with mining companies this year in a move that is likely to increase costs for miners within the country, a senior industry official said.
• David Rosenberg, chief economist and strategist at Gluskin Sheff, noted debt-strapped governments are pulling in around 9.5 percent more revenue year-over-year, showing the economy may be getting stronger.
• Conversely this increase in government revenue may be a pick-pocket effect of governments’ having raised sales taxes, unveiled high income surcharges or boosted top marginal rates. This, along with the hammering the consumer has taken from rising food and fuel costs, is absorbing a near 23 percent share of wages and salaries.

Opportunities

• There is chatter in the foreign exchange market that China may do a surprise 10 percent Yuan revaluation and Greece may strike a deal to cut its bonds by 40 percent. It would appear the Chinese government has guided multinational corporations to expect a 5 percent revaluation in the near term, but 10 percent is a big number and would likely support the gold price.
• Earlier this week the Chinese supported the Spanish bond auction. Notably, the eurozone is China’s largest trading partner and it appears they may be more concerned about keeping the euro from collapsing versus a steady decline in the dollar.
• Gold’s decade-long bull run could continue in the next four years, though at a slower pace, with positive inflation risks partially cooled by a shift towards more normal economic conditions, analysts polled by Reuters said. The median forecast of 12 analysts polled in the past two days for the average price in 2015 was $1,700 an ounce. “Gold will be underpinned by sovereign debt in the eurozone, United States and Japan, as well as the dollar weakness and further reserves diversification by central banks,” said Robin Bhar, an analyst at Credit Agricole.

Threats

• A U.S. law threatens natural treasures including Grand Canyon National Park as mining claims on public lands proliferate, an environmental group said. The 1872 Mining Law, signed by President Ulysses S. Grant, allows mining companies, including foreign-owned ones, to take about $1 billion a year in gold and other metals from public lands without paying a royalty, according to a report by the nonprofit Pew Environment Group. Non-governmental organizations have been very successful in aligning themselves with state and federal regulators that see creating new rules as a means to greater job security.
• Nevada mining operations may soon face three tiers of regulations and legislation aimed at eliminating constitutional caps on net proceeds of mines taxation and clamping down on net proceeds tax deductions. Senate Majority Leader Steven Horsford argued that state regulators need to close mining tax loopholes as soon as possible “so the state gets every dollar it’s entitled to.”
• Jim Rogers, a well respected commodity expert, said “Silver and gold, yes, will be a bubble someday…There’s no question in my mind that all commodities will be a huge bubble someday. But I don’t think that bubble is going to happen in 2011. I think it’s going to be more likely 2017, or 2018…you know, a few years from now. I’m not picking a year, just saying its a few years away.”

Tags: Chief Economist, Custodial Accounts, David Rosenberg, Dollar Index, Electricity Prices, Food And Fuel, Foreign Exchange Market, Gold, Gold Bullion, Gold Equities, Gold Market, Gold Price, Investment Management Company, Marginal Rates, Philadelphia Gold, physical gold, precious metals, Silver Index, Spot Gold, Texas Teacher, Wages And Salaries
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