China and silver

from LeMetroploe cafe

Since the start of 2009, Chinese M2 money supply has taken off like a rocket. As of March 2009, Chinese M2 is growing 26% year over year.

In comparison to the US money creation which is going down a derivative rathole, Chinese money creation is going towards the purchase of real assets. According to the latest from Gary Dorsch, http://www.kitco.com/ind/dorsch/apr152009.html , China bought 3.86 million tons of soybeans in March, up 66% from a year earlier, and the 2nd highest monthly amount ever. After checking the futures market for soybeans, I noticed that this market is pretty close to complete backwardation.

The action in copper is even more impressive. Again, according to Gary Dorsch, Chinese copper imports are up 71% to 451,000 tons in the first two months of this year from a year ago. As we know, the price of copper has been on a tear this year, up over 50%. A case could be made that this is due to the buying by the Chinese.

I have been tracking the copper futures prices for years. An amazing incident just occurred. About one week ago, I noticed that the price of the April 09 contract exceeded the May 09 contract - a minor partial backwardation for copper. On Friday 4/17/09, the copper market jumped into almost complete backwardation over one or two trading days at most. I have never seen a market jump into almost complete backwardation so fast. Enclosed is the pricing for copper from the WSJ.

http://online.wsj.com/mdc/public/page/2_3023-fut_metal-futures.html?mod=topnav_2_3000

It appears that China is thinking long term and stocking up on strategic metals and other commodities. Rather than just watching fiat currencies go up in a puff of smoke, China is buying strategic metals and commodities. With almost $2 trillion in foreign currency reserves, China could be buying these commodities for a long time. The question becomes, what is the next strategic commodity that China will start buying?

Other than oil which China is stocking up on, what could be more strategic than silver? If you want to fly a plane, high performance silver bearings are used in the jet engine. If you want to operate a car, over 40 silver tipped switches are used to start the engine, activate the power brakes, steering, windows, etc. You will need silver in the printed circuit boards to control the operation of planes, cars, electrical appliances, security systems, cell phones, telecommunication networks, solar panels, water purification, nano technology, biomedical applications etc. The critical uses for silver seem almost endless, especially because the price of silver is currently so inexpensive.

Let's assume the U. S. Geological Survey is correct with the world's total proven silver reserves of 270,000 tons. There is approx. 15 years left of silver at current mining rates. If you are thinking long term and you are China, why would you not start purchasing silver for strategic purposes right now? The Chinese have already started purchasing copper and soybeans. If you want to manufacture for the next 20 to 30 years, the near term purchase of silver over a considerable length of time would make sense.