Bloomberg survey quotes GATA pals and notes central bank dishoarding


By Peter Robison
Bloomberg News Service
Monday, August 1, 2005

Now that China has responded to U.S. pressure to revalue its
currency, there may be some unintended winners: Canadian tourists
and Australian copper miners.

Big beneficiaries may include mining companies from Melbourne-based
BHP Billiton Ltd. to Rio Tinto Plc of London and currencies of
commodity-rich nations, such as Australia and Canada, investors say.
A stronger yuan makes dollar-priced copper and oil cheaper and
boosts buying power for Chinese companies like Cnooc Ltd., bidding
for U.S. oil producer Unocal Corp.

The administration of President George W. Bush pushed for a
revaluation to help U.S. exporters and says China's July 21 decision
to let the yuan rise 2.1 percent will help ease the U.S. trade
deficit. In May, the trade gap totaled $55.3 billion.

Even so, the shift may backfire for the U.S., prompting China to cut
investment in U.S. Treasuries, raising interest rates and curbing
spending, says Diana Choyleva, senior economist at Lombard Street
Research Ltd. in London.

"Beware what you wish for," Choyleva says. "The Washington
establishment will find that getting its way with China on the yuan
exchange rate forces it to cut U.S. domestic demand."

China abandoned a decade-old peg of the yuan to the dollar,
previously fixed at a rate of 8.3. Instead it will link the yuan, a
denomination of China's currency the renminbi, to a group of
currencies of major trading partners, including Europe and Japan.

China may shift investments to government bonds in Europe and Japan
from the U.S., contributing to higher U.S. interest rates, says Jane
Coffey, head of equities at Royal London Asset Management in London,
which manages $11 billion.

The most immediate beneficiaries of the currency revaluation are
commodities producers, says John Segner, senior portfolio manager at
AIM Energy Fund, which has $797 million in assets. China, the
fastest-growing major economy, is the world's biggest buyer of
copper and steel and the No. 2 consumer of oil after the U.S. Now,
China will be able to afford more oil and other raw materials
because the goods are priced in dollars, he says.

"We're all competing for oil," Segner says.

Crude oil that is traded in New York closed on July 29 at $60.57 a
barrel, a 6.8 percent gain from its price of $56.72 before China's
revaluation. Copper, used in pipes and wiring, closed at $3,517 a
metric ton July 29 on the London Metal Exchange after reaching a
record $3,525 a day earlier.

Shares of BHP, the world's largest mining company, gained 3.8
percent in the seven trading days after China's revaluation,
reaching a 52-week high of A$19.36 on July 29. The company already
planned to boost sales to China by more than a third this year. Rio
Tinto, the biggest seller of iron ore to China, also closed at a 52-
week high on July 29.

The revaluation makes U.S. purchases more affordable for Cnooc,
China's third-largest oil company, says Dean Orrico, who manages a
C$120 million ($98.5 million) energy fund for closely held
Middlefield Capital Corp. of Toronto.

The board of El Segundo, California-based Unocal last month
recommended Chevron Corp.'s $17.4 billion cash-and-stock offer over
an $18.5 billion cash bid from Cnooc. The Chinese company hasn't
said whether it will raise its bid.

The revaluation reinforces the attractiveness of so-called Canadian
oil-sands stocks, Orrico says. Companies like Calgary- based Suncor
Energy Inc., the world's No. 2 miner of oil sands, use mechanical
shovels to scoop oil-encrusted sands and process the tar-like crude
they contain into synthetic oil.

"The Chinese have realized, and maybe sooner than the U.S. has
realized, that we are in an energy crisis," Orrico says. "They have
been trolling around the oil sands for a long time and that's going
to continue to be the case."

The revaluation may be limited. China on July 26 tried to damp
speculation that the 2.1 percent appreciation is the first in a
series of changes. The government said it wouldn't revalue the yuan
again in the "foreseeable future."

China had kept the yuan from strengthening by plowing part of its
trade surplus with the U.S. -- about $162 billion last year,
according to the Commerce Department -- back into U.S. Treasury
securities. China's holdings of the securities totaled $243.5
billion at the end of May, second only to Japan.

As China buys more yen or euros under its new exchange-rate system,
it will probably buy more European and Japanese government bonds,
further widening their spread over U.S. bonds, says Andrew
Bosomworth, a Munich-based fund manager for Newport Beach,
California-based Pacific Investment Management Co., the world's
biggest bond fund.

"There's been a substantial change in the flow of global funds, and
this could keep going," Bosomworth says. The revaluation reinforced
the company's position of favoring European bonds over U.S. debt, he

As fewer investors buy bonds, the price falls and the yield rises.
U.S. Treasuries last month had their biggest monthly decline since
November. The yield on the 10-year U.S. Treasury was 4.28 percent on
July 29, higher than the 3.24 percent for similar-maturity German
bonds. The spread of 104 basis points -- more than one percentage
point -- is the highest in five years and is more than the 86 basis
points before China's revaluation and 57 basis points at the start
of the year.

U.S. consumers will either have to curb purchases of Chinese
imported goods as they become more expensive or spend more,
potentially spurring inflation.

"This is the first nail in the coffin for U.S. bond yields," says
Royal London Asset Management's Coffey. She predicts a rebalancing
between the Chinese and U.S. currency, with an unspecified U.S.
currency decline as the U.S. consumes less.

The revaluation may help the Australian and Canadian dollars extend
gains against the U.S. currency, says Benedikt Germanier, a currency
strategist at UBS AG. Since 2003, the dollar in Australia, a so-
called commodity currency because more than half of its overseas
shipments are raw materials, has climbed 35 percent against the U.S.

The Canadian dollar has risen 28 percent against the U.S. currency
in the same time. Since July 20, the Australian dollar has risen to
75.71 cents from 75.57 cents, while the Canadian dollar has dipped
to 81.7 cents from 81.9 cents.

"All commodity currencies can take advantage of the Chinese
revaluation," says Germanier.

Gold and mining stocks may gain as a weaker dollar prompts investors
to seek a safe haven in metals, says Sean Zheng, who helps manage
$100 million at Dingtian Asset Management in Beijing.

"Of all metals, gold is preferred," he says. "China will lower the
weighting of dollars in its basket, and this may trigger a number of
countries to follow, so the long-term outlook on the dollar is weak.
A weaker dollar will boost the gold price."


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