Gee a lot can change in a day. Before we get to the energy, Australia’s manufacturing future, and just where the biggest mob of drongos is, a quick word about the BHP, Rio Tinto, China love triangle.

–Yesterday’s rumour in the Australian that China Inc. is prepared to spend up to $22 billion to secure a 10% equity stake in BHP remains just that, a rumour. If a Chinese-backed buyer was trying to buy BHP for a song, it’s not working out very well. That makes you wonder again what the real purpose of such a move would be. Is it to own a piece of BHP so that when it does, eventually, acquire Rio, the Chinese shareholders have a call on Rio’s assets?

–Or, is it a feint? Is it tactical misdirection designed to depress Rio’s share price so another less-than-friendly raid on Rio can be conducted at a slight discount? Indulge us. With enough leverage, we reckon a hedge fund could turn this into a trading strategy.

–Theoretically, Rio’s shares are now a derivative of BHP’s. Investors know BHP has bid 3.4 of it shares for every one share of Rio. After BHP’s strong performance yesterday, it would have taken just 3.29 BHP shares at $41.91 to buy one of Rio’s shares at $137.88.

–If the market takes BHP’s offer as kind of “net asset value” of Rio, then any time the ratio drops below 3.41, Rio should be bought or BHP sold. On the other hand, if the ratio exceeds 3.41, either Rio is overvalued or BHP undervalued. Trade accordingly. In other words, you can use the ratio of BHP’s offer to determine a premium or discount in both shares.

–This, of course, is complete nonsense. You cannot determine the value of either company relative to the other without including a serious discussion of the value of what they produce: coal, oil, metals ores and so much more. And in any event, there is a pointed difference of opinion between BHP and Rio management over just what Rio’s current production and future projects are worth today.

–If you’re China (or charged with representing China’s national interests), perhaps the future cash flows from the assets don’t matter as much as the actual possession of the assets. Perhaps it’s the ownership of those assets that’s more important, guaranteeing your domestic metals producing industries have raw materials.

–But who knows? All we really know is that unlike the credit markets filled with garbage bonds and CDOs and fictitious assets, Australian companies have real assets on the balance sheets…and the market value of those assets (in addition the geopolitical value) is grinding relentlessly up. That’s a good thing for us individual investors.

–It has been a bad week for the International Monetary Fund. The executive board of the Fund agreed earlier this week to a plan which would see the Fund sell about 403 metric tons of its gold (13 million ounces or so) to raise US$11 billion over the next few years. The Fund, which publishes research on the global economy and has to pay countless bureaucrats in Washington, is having trouble paying the bills.

–Selling your capital assets to meet your living expenses seems like a bad strategy. You might as well eat your own seed corn for dinner over a fire stoked by the wood from your kitchen table. This strategy seems to suggest to us that the IMF is one of the post-World War Two institutions that may not survive the current financial shakeout (or will emerge in radically smaller form.)

–The more urgent question is whether IMF gold sales will depress the gold price. The Fund has 3,217 metric tons of gold in its reserves and is a formidable potential seller/price depresser of the yellow metal. Gold, however, closed up in the futures trading by 2.1% to finish in New York at US $937.50.

–If the U.S. dollar keeps making pathetic new lows (and its management by the Fed seems to suggest it will) then we reckon investment demand for gold as an inflation hedge will continue. London-based GFMS published a report yesterday in which it said gold would reach a “peak” between US$1,100 and US$1,200 either late this year or early in 2009.

–Is that really the peak? Hmm. We’ll see. The investment demand for gold grows as the dollar gets weaker.

–Below is a chart of the number of metric tons of gold held by the largest gold exchange traded fund in the States, GLD. You can see that since the fund launched in 2004, its rise has tracked the rise of the gold price with a few minor interruptions. GLD currently has 642 metric tons of gold (or at least it says it does…there is some debate in the gold bug community over whether GLD actually has this gold, but we’ll lave that aside for today.

–While the IMF sells its gold to pay the rent, it also reported that it believes ’s about US$1 trillion in total credit market losses, originating (but not ending) with the sub-prime mess. Specifically, the IMF said total losses and write offs would come to US$945 billion. US$565 billion of that is mortgage-related, with the rest coming from the commercial real estate and consumer lending market.

–Now Wall Street and its friends in Europe have already written off about US$232 billion in losses. That means if the IMF is write, we’re barely a quarter of the way there. The IMF could be wrong, of course. It wouldn’t be the first time. But the premature declarations of an earnings recovery in the equity market are pretty fanciful, given the quantity if known unknowns and unknown unknowns lurking on corporate and personal balance sheets.

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