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Gold/Mining/Energy : Mining News of Note -- Ignore unavailable to you. Want to Upgrade?

To: LoneClone who wrote (44689)	10/7/2009 8:40:41 PM
From: LoneClone	Read Replies (1) \| Respond to of 196881

Two Recoveries Are Underway, But Only One Is Strong And Good For Metals By Rob Davies minesite.com It is well known that the market can believe two things at the same time. Bear and bull theories can co-exist. The prevailing price of an asset is the best balance between the two arguments. However, the current state of the capital markets is more complex than usual because there are currently positive and negative arguments for not just one economy, but for two. There is the “normal” western economy that is still staggering along after the shock of the biggest financial crash in over half a century. And then there’s the totally new economy, represented by the emerging markets, and led by China. Unsurprisingly the average investor can be left totally bemused as market commentators trip up trying to explain what is actually going on. According to John Authers of the Financial Times, the S&P 500 now exceeds the level that nine out of ten strategists forecast for the end of the year. Does that mean sell? Meanwhile, famed hedge fund manager Crispin Odey says that the while capital markets might be in a bubble, it is a rational bubble. He argues that because governments are underwriting the markets with gargantuan levels of cash, both real and fabricated, capital values can only go up. All this liquidity is being used by Western banks to buy short terms bonds, thus driving down yields on two-year paper to below one per cent in the US and UK. With such cheap money, it is not surprising that other assets, like equities and commodities, have risen as the opportunity cost of holding them is so low. The fear, of course, is that interest rates will rise at some point and disturb this happy story. Here is where the conflict between the two global economic systems comes to a head. China has US$2,000 billion worth of foreign exchange reserves to fund its growth. Western economies have… well a lot of debt and very low interest rates. Last week, reports that Chinese imports of copper fell 25 per cent in August to 219,000 tonnes were enough to drive copper prices down 3.4 per cent to US$6,089 a tonne. Other metals were dragged down in it its wake. But, according to Macquarie Bank, China still has 400,000 tonnes of copper stockpiled. At a value of US$2.4 billion that is quite a bit of cash to have tied up. But then China knows it can fabricate it to make products either to improve its own infrastructure or to sell to the west. It undoubtedly makes more sense for the Chinese to hold metal than dollars, especially if 60 per cent of its reserves are in dollars already. Contrast that policy to that of European carmakers in the face of massive overcapacity. Governments have become heavily involved in bailouts, but no firm action has been taken. Sergio Marchionne, the Fiat boss, described it well when he noted that no car plants have been closed in Europe as a result of the crash. Even so, it is clear that metal demand in Europe will remain weak while Western countries, companies, and individuals are so indebted. Any recovery will be weak and slow. That may be cause for concern for industries that service the developed markets, and explains the dilemmas many investors face in regard to current equity valuations. But commodities, and miners, are dancing to a different tune in a different market which is stronger and well funded. The news this week that Michael Geoghegan, chief executive of HSBC, is relocating to Hong Kong clearly shows which market he thinks is going to be more important in the years ahead. But commodity investors have known that for a long time already.