By Kishori Krishnan Exclusive To Gold Investing Newswidth=300

National security concerns have reared their head. On December 21, President Obama may by urged to agree to disagree on Chinese investment in a Nevada mining operation, given that is near a US naval base.

US mining major Firstgold (FGD:TO) has spent $16 million over the last 24 months developing a processing facility at Relief Canyon, located outside Lovelock Nevada, on the site of the earlier Pegasus Gold Mine.

China’s giant Northwest Nonferrous International Investment Company wants to buy 51 per cent of Firstgold, its first purchase of a mine operator in the United States.

The US miner has been advised by The Committee on Foreign Investment in the United States (CFIUS) that they will recommend to President Obama that he reject the proposed investment by the Chinese firm.

The proximity of Firstgold’s properties to the Fallon Naval Air Station and related facilities have come under scrutiny. The US Navy uses Fallon for tactical aviation training.

“Foreign investments in the US are critical to economic growth and job creation here at home, but we have an obligation to prioritize national security,” deputy Treasury secretary, Neal Wolin, said in a statement released Thursday, in response to questions about the scrutiny of proposed deals.

Bigger picture

A broader issue is at play here. As foreign investors try to buy American industrial assets, the US administration will have to take a call on how to protect national security even as it toils to promote economic recovery.

It may be recalled that the Bush administration had similarly faced flak for allowing a Dubai company to buy control of a dozen American port terminals. The plan was eventually scrapped.

In 2006, investors around the globe watched in dismay as members of the US Congress condemned the acquisition by Dubai Ports World of Peninsular and Oriental Steam Navigation Company’s US ports management business.

The transaction, approved by CFIUS, collapsed under withering political criticism.

Like the acquisition of gold miner Firstgold, these are decisions that could set off political firestorms.

And what will add fuel to the fire is that Washington officials are, any which way, concerned about the growing Chinese influence on precious metals.

Could this be the veritable last straw, in geo-political relations between the two super-powers?

High ground

“This smacks of anti-Chinese protectionism at a time when we need to be encouraging foreign investment to create jobs and expand our economy,” said Mark Nordlicht, managing partner at Platinum Management, a Firstgold investor.

Commented Terry Lynch, Firstgold CEO: “This is very difficult news to receive. While we certainly respect the process…, we disagree 100 per cent with their [CFIUS] conclusion.”

“We just don’t think the right decision has been made. … To see this as a national security risk, you really have to give your head a shake,” he added.

“It’s comical. … If the Chinese want to buy a house in Lovelock, Nevada, nothing’s going to stop them…We fail to see the connection between US national security and our principal asset the Relief Canyon mine, which has existed at its present location since the early 1980s. Our property is over 50 miles away from the Fallon base and surrounded by several other mining properties.”

The unspoken question here is: would the same treatment be meted out to the other mines in the area, which could be scouting for foreign investment?

Dragon’s hoard

Given that national security is at stake in this particular case, a decision, either way, could lay the foundation for all further investments into the US.

It also turns the spotlight squarely on any and all investments originating out of China.

China’s purchase of gold in April this year, profoundly altered the gold market’s long-standing synergy.

At an estimated $1.95 trillion, China manages the world’s largest foreign currency reserves. Mid-2009, the Asian major boosted its gold reserves by 76 per cent since 2003, to emerge at the fifth spot by country, in the global scale.

The nation increased its reserves by 454 tons to 1,054 tons through domestic purchases and refining scrap metal. The amount is more than Switzerland’s 1,040 tons, World Gold Council data showed, and is worth $31 billion at April’s prices.

By becoming gold’s most prominent champion, China has mounted an aggressive defense of its domestic gold mining industry, and by proxy the rest of the industry as well.

Over the last few years, China has quietly become the world’s leading gold producer. Most of that production never leaves China’s borders, but goes instead to the national reserves as a hedge against its currency holdings.

China, by the simple expedient of defending its own interest, accomplishes much for the gold mining industry as a whole. And aiming to shore up 2600 tonnes of the yellow metal translates to roughly one-third the US gold reserve — a significant ambition by any measure.

Neil Mellor, Bank of New York-Mellon, succintly put it: “We’ve got a situation where Geithner is smiling and has no choice but to stress the credibility and stability of the US financial and economic system, while the creditors [such as the Chinese] smile back and say they believe him, while at the same time giving hand signals to their reserve managers to get rid of these things [U.S. Treasuries].” -

As America struggles out of a devastating recession, China has watched the value of its US reserves wither.

Don’t forget: China remains the principle buyer of US government bonds so critical to President Obama’s recovery plans, but what happens if China soon reaches the point where it will simply decide that it is too risky to continue serving as America’s personal banker?

What then?

Analysts insist that China can ill-afford to do anything that will delay an eventual recovery in the US - it simply has too much to lose. And the reality is that, the US and China are in this thing together.

Both countries are dependant upon each other.

But when there are matters that concern national security, will the US administration look the other way?