Monday, September 7, 2009

Do These Dots Connect?

I've spent several days reading and trying to understand the Derivatives Market, and I still barely have a clue. I do not begin to qualify as any kind of financial analyst, but I do read. And, some things stand out in recent news making me wonder if there is any connection between them?

First, we all know China holds a huge stake in the USA. I don't know how much of a stake, and I'm not sure I want to know.

Then last week China made this blip on the Financial Market radar: “BEIJING, Aug 29 (Reuters) - Chinese state-owned enterprises (SOEs) may unilaterally terminate derivative contracts with six foreign banks that provide over-the-counter commodity hedging services, a leading financial magazine said.

China's SOE regulator, the State-owned Assets Supervision and Administration Commission (SASAC), had told the financial institutions that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying, "On September 1, 2009 Reuters said that the Banks, not the commodities would be at risk if China followed through."

Then, in several other unrelated reports:

1. Sep 3 HONG KONG (MarketWatch) -- Hong Kong is pulling ALL its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at Hong Kong's airport, in a move that won praise from local (Chinese) traders Thursday.

2. China pushes silver and gold investment to the masses.

3. The IMF (International Monetary Fund) said last Wednesday China has agreed to purchase approximately $50 billion worth of bonds denominated in Special Drawing Rights (SDR's, the IMF's own currency), a fundraising effort that is part of a broader push to bolster the IMF's resources.

Many analysts had expected China would sell some of its more than US$2 trillion in foreign-exchange reserves to buy the IMF bonds, in order to reduce its exposure to the U.S. dollar. But according to the agreement posted on the IMF Web site, China will use its own currency, the RMB, called the renminbi.

"The addition of the SDR-denominated bonds to China's assets should help the nation painlessly diversify its foreign-exchange reserves, the world's largest. U.S. dollar assets now account for a good portion of their reserves, but because China's positions are so large it would be difficult for it to switch out of the dollar and into something else without causing market turmoil."

In a research note, Barclays Capital economist Wensheng Peng said the currency used for China's payment will eventually come back into China, as the funds are lent out to member nations who then convert them to major currencies such as the dollar.

4. ChinaDaily ran this story: The national flag of the People's Republic of China (PRC) will be hoisted at the South Lawn of the White House in Washington on September 20, 2009.

Chinese associations in the United States had applied to hold a ceremony in front of the US President’s residence to celebrate the 60th anniversary of the founding of PRC.

Chen Ronghua, chairman of Fujian Association of the United States, told reporters that their application was approved not only because of the sound Sino-US relations but also because China is a responsible country.
"Many Americans admire China due to the success of last year’s Beijing Olympics," said Chen.

More than 1,000 people will attend the ceremony and the performances held after it, according to Zhao Luqun, who will direct the performances. Zhao said the performances will demonstrate the friendship, magnanimous spirit and kindness of modern Chinese people.

5. That brings me to the IMF itself, the World Bank, and other IFI (International Financial Institutions). These groups control the world's finances. All the loans are made with strings attached, and usually as political as monetary. They controlled all the world's money, until recently... and now, still "mostly" although there are other movements rising on the wind that may affect each of us.

Understanding the history and global reaches of monetary policies a bit better just might help each of us individually, and I will cover some of it in another post.

But for now, I would buy gold (if I had any money!). Not investments in gold funds, but real gold (coins, mini-bars) to have in your own possession. It is a valid, world-wide medium of exchange.
The Wall Street Journal reports gold just increased another 2.3% as the USD continues to drop.

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