China seen switching out of copper and into gold and platinum

By Matt Whittaker
Associated Press
via Yahoo News
Friday, December 21, 2007

http://biz.yahoo.com/ap/071221/china_gold_platinum.html?.v=1

NEW YORK -- China, the 800-pound gorilla of copper buying, is turning instead to gold and platinum as the price of the red metal continues to sink and it sees precious metals as good investments against currency concerns, market watchers say.

A string of interest-rate hikes in the world's largest copper-buying nation could further dampen demand for the metal as increasing bank reserve requirements make borrowing more difficult for copper producers and smelters that want to expand capacity.

Meanwhile, the Chinese are buying gold and platinum as an investment, seeing the metals as a hedge against the declining U.S. dollar and anticipating they will rise further in price, said Ralph Preston, senior market analyst with Heritage West Financial.

While this buying is among supportive factors for the price of gold and platinum, market participants in the Asian nation still see copper as overpriced and aren't stepping in right now, contributing to copper's recent price slide, market watchers say.

The Chinese are staying away from the red metal because they "don't want to just throw their money into the wind," Preston said. "Even though they've got a bunch of money, they don't want to go spending it frivolously."

Frank Lesh, broker and futures analyst with Future Path Trading, said the Chinese are showing some buying interest in copper. But that might not show up as much in price moves for the metal like it does in platinum.

That's because the market for copper -- as well as for gold -- is larger than the one for platinum, so price reactions could be exacerbated in the white metal's smaller market.

"I wouldn't doubt they're buying the platinum," Lesh said, adding that the Chinese need the metal for their burgeoning automotive industry.

Catalytic converters for automobiles are one of the main industrial uses for platinum.

In addition to manufacturing uses for gold and platinum, the Chinese are also buying the precious metals as a hedge in case Beijing decides to let the yuan float, said Larry Young, senior trader with Infinity Futures. The currency is only allowed to fluctuate in a range that is tied to the value of the U.S. dollar.

"They're looking at several strategies" for trying to get the lowest price for their commodities, Young said.

Because of a worsening global economic outlook and financial-market uncertainty, the Chinese want the safe haven that gold and platinum offer even above Treasurys, Young said.

"They want something that they can touch and feel," Young said.

At the same time, China isn't entering the copper market in force, Young said.

"They're still anticipating a pullback in price," Young said.

Players in the Asian nation are anticipating additional supply coming onto the market from mines that ramped up production last year when prices were higher, Young said.

Of China's $1.3 trillion in cash reserves, nearly 65 percent is in U.S. Treasurys and only 1.6 percent is in physical gold, said Bill Reynolds, investment adviser and commodity specialist with Wellington West Capital.

"This past year -- rightfully so -- their belief that the U.S. dollar was and will continue to devalue ... has had the Chinese government and others continuing to purchase gold," Reynolds wrote in an e-mail. "This, along with a more liberal Chinese government, which has allowed the citizens to now purchase more luxuries, such as jewelry."

As the world's most populous country, that demand will likely continue to support precious metals prices, Reynolds wrote.

In copper, China's importers are reducing yearly bookings for 2008 delivery because they are concerned that a Beijing-led economic slowdown will dampen overall demand for the red metal, Reynolds wrote.

The People's Bank of China on Thursday lifted its benchmark one-year lending rate by 0.18 percentage point to 7.47 percent, the nation's sixth interest rate increase in 2007 aimed at curbing inflation.

"We think these measures, along with the steep rise in banking reserve requirements, will eventually slow the Chinese economy down since the hikes are now occurring from elevated base levels and are likely to have more impact," an MF Global research note says.

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