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U.S. Dollar in Disarray as China Buys Resources and Assets

Stock-Markets / China Economy Jul 27, 2009 - 01:11 PM GMT

By: Frank_Holmes

Stock-Markets

Best Financial Markets Analysis ArticleThis article is from portfolio manager Romeo Dator, who covers China for the U.S. Global Investors investment team.

Since peaking on March 5, the dollar has fallen nearly 12 percent against the trade-weighted U.S. Dollar Index (DXY).


This weakness has coincided with price gains for gold, oil and copper, but several other commodities are starting to break out as well. Cocoa, sugar, cotton and orange juice prices have all jumped recently.

Dollar weakness has been especially bullish for emerging markets.

This chart above shows year-to-date performance of the dollar versus the currencies of the BRIC (Brazil, Russia, India and China) countries. The dollar’s demise has led to large percentage increases for each of the country’s respective markets.

The relationship works like this: Let’s say one dollar equals 10 Brazilian reales and an American investor purchases a share of stock in Brazil for 10 reales, or one dollar. If the dollar depreciates to eight reales per dollar, the investor could sell the share and convert the proceeds back to $1.25. That’s a 25 percent gain based on currency movement only.

A similar performance pattern this year isn’t the only thing China and Brazil have in common. The two countries have formed a strategic relationship over the past couple of years.

As the export market to the U.S. weakened due to the recession, Brazil and China turned to each other to offset the weakness. The reason is simple—China needs commodities and Brazil needs export markets.

In June alone, China’s imports from Brazil reached nearly $3 billion, a 278 percent increase from the low in early January. That’s a dramatic increase but still below the level prior to the global credit crisis. As the global economy continues to improve, we should see this figure rise even further.
China is out making deals across the world. Last week’s BusinessWeek cover story details China’s recent shopping spree which includes a car business, appliances and department stores.

China is flush with cash and 2008’s meltdown has allowed it to purchase assets at bargain-basement prices. As a result, China’s overseas investments grew to $52 billion in 2008, more than double the $26.5 billion the country sent overseas in 2007.

The second reason is China’s looking to diversify away from its massive U.S. Treasury holdings. By purchasing these companies, China is acquiring the expertise needed to move the country up the manufacturing food chain.

If growth in China continues at the level we saw in the second quarter, it’s likely China’s shopping spree is just getting started.

By Frank Holmes, CEO , U.S. Global Investors

Frank Holmes is CEO and chief investment officer at U.S. Global Investors , a Texas-based investment adviser that specializes in natural resources, emerging markets and global infrastructure. The company's 13 mutual funds include the Global Resources Fund (PSPFX) , Gold and Precious Metals Fund (USERX) and Global MegaTrends Fund (MEGAX) .

More timely commentary from Frank Holmes is available in his investment blog, “Frank Talk”: www.usfunds.com/franktalk .

Please consider carefully the fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Gold funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The price of gold is subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in gold or gold stocks. The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of 12-31-07 : streetTRACKS Gold Trust.

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