Now that the world's attention has drifted away from Europe's crisis, the U.S. dollar is back in focus as the troublemaking currency du jour.
After watching the U.S. dollar index drop like a stone in recent weeks, China appears increasingly less willing to remain either a silent bystander or a hapless victim. As the largest foreign creditor to the U.S. -- with $868 billion in Treasury bonds -- China has ample cause for concern.
Nothing to treasure?
Yu Yongding, a member of the government-sponsored Chinese Academy of Social Sciences (and a former advisor to China's central bank), delivered a poignant vote of no confidence this week in the safety of U.S. Treasuries. Dissenting from the prevailing bond market sentiment -- which sees investors still buying U.S. bonds in droves despite historically low yields -- Yu warns: "I do not think U.S. Treasuries are safe in the medium and long run."
This isn't the first time China (or Chinese officials) has expressed deep concern over the health of the U.S. dollar and Treasury bonds. Fools will recall that Chinese Prime Minister Wen Jiabao indicated last year that China was "concerned about the safety of our assets." A few months earlier, China expressed support for a new global reserve currency regime that would replace the dollar as the dominant reserve currency with a basket of foreign currencies (using derivative-based International Monetary Fund instruments called SDRs). The rhetoric from China then grew rather quiet as the dollar met with several rounds of countercyclical strength. This week seems to be about making up for lost time.
The same Chinese Academy of Social Sciences' deputy chief of international finance research, Zhang Ming, warned separately this week that: "The U.S. government has strong incentives to reduce its real burden of debt through inflation and dollar devaluation. Whichever way it is, the yuan-recorded market value of Treasuries will fall, causing huge capital losses to China's central bank." If the dollar's declining purchasing power is now an inevitable fate, as these Chinese officials seem to suggest in their blunt remarks, then perhaps we really are fast approaching a terminal saturation of China's appetite for U.S. debt. If that were true, we might expect to see some corresponding rumblings within China's official stance toward gold.
As if on cue, China came forward with a crucial pair of moves this week with respect to gold. The first was a major liberalization of China's gold market by facilitating greater import and export activity in gold and opening the Shanghai Gold Exchange to additional foreign entities. The second (and arguably more significant) development deserves our close inspection below.
Here, world, have your dollars back
In a landmark development for the precious metal market, China's central bank threw a lifeline to a credit-strapped global mining industry this week by explicitly directing banks to extend credit: both directly to producers of bullion (presumably gold and silver), and to Chinese entities seeking overseas acquisitions in the sector. The bank "will place heavy emphasis on supporting large-scale gold producers in their development and overseas expansion plans."
After carefully tracking China's momentous activities investing in resources and related projects around the globe in recent years, I look forward to following this overlooked acquisitive trend as it flows directly into the markets for gold and silver.
Exploring the possibilities
I encourage Fools to ponder the significance of this announcement for a range of highly promising precious metal deposits around the world that may have been sidelined to date by their sheer scale and/or lack of available credit. The most obvious example is Seabridge Gold
With familiar names like George Soros and John Paulson throwing their weight behind a previously stagnant NovaGold Resources
With its development capital focused elsewhere, Barrick Gold
Financing outside the box
If China's actions in the energy and commodity markets provide any indication, Fools may be wise to consider the likelihood that China's upcoming involvement in the precious metals sector will take a variety of forms beyond mere acquisition or investment stakes in miners.
For a prime example, consider the meaningful precedent provided by China's $10 billion capital infusion into Brazilian energy star Petroleo Brasileiro
Borrowing a page out of silver stream specialist Silver Wheaton's
Fools interested in investing in China are encouraged to test-drive the Motley Fool Global Gains newsletter service with a 30-day free trial. The Global Gains team keeps a close eye on China for opportunities arising from decoupling.
Fool contributor Christopher Barker carries a silver coin that reads, "Honest value never fails." He can be found blogging actively and acting Foolishly in the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of NovaGold Resources and Silver Wheaton. Petroleo Brasileiro is a Motley Fool Income Investor selection. The Motley Fool's disclosure policy is 0.999 pure.