This is a snippet from a recent issue of the Gold Forecaster withSubscriber-only parts excluded.Suddenly the pressure from China to change the world’s monetary order is
pressing. At the G-8 China asked for the forum to debate proposals for a new
global reserve currency! They were largely ignored! China’s rising presence in
the global economy [$2 trillion reserves now] and the threatening weakness of
the $ is prompting China to act in this way and with speed. Not only the
Chinese but the French, Finance Minister and Central Bank President called for
greater currency stability and a system to avoid piling up currency reserves as
we see with the $. It is clear that more and more countries are objecting to the
debasement of the U.S. $ through Trade deficits and Quantitative Easing.
In March, the People’s Bank of China Governor, Zhou
Xiaochuan's proposed that the Special Drawing Right, a synthetic currency, [but
one aimed at being a basket of the world’s most traded currencies] be used as an
international reserve currency that's delinked from sovereign nations. The
People's Bank of China reiterated this idea in its 2008 review. It said that,
“the IMF should expand the functions of its unit of account, Special Drawing
Rights”. The new reserve currency should be managed by the I.M.F., as well as
for closer international supervision and scrutiny of “overly loose” U.S.
financial and monetary policies. Any opposition to these proposals brings much
uncertainty to the globe’s monetary system, a climate in which gold will rise
. Right now central bankers across the world are renewing the gold
debate, should they hold more gold in the light of the dangers to the global
Previous Chinese proposals on this subject were not welcomed at either the
I.M.F. or in member nations of the Organization for Economic Cooperation and
Development. Because the G-8 did not entertain the Chinese proposal and it
essentially reaffirmed the US $’s status as a reserve currency, China is likely
to act unilaterally
on the matter, much to the detriment of stability in
currency markets and future cooperation in global monetary reform. The boldness
of these moves implies a sense of urgency by the Chinese. We believe that action
will be seen on this front soon and suddenly.
The possibility of a sudden $ devaluation prior to the end of 2009 will only
make the Chinese act more forcefully a large positive for gold!
The Path to a Global Reserve Currency
The Yuan looks as though it will be fast tracked from a protected national
currency to an international reserve currency with the first sprint to be
completed in 2010. The pace will be dictated by two factors, firstly the pace at
which the Chinese
dictates and secondly by the I.M.F. schedule for the
review of the composition of the S.D.R. in 2010. By that time the Yuan must
have a heavy presence in international markets in at least Trade flows
For the Yuan to move in large amounts, eventually as capital, it must be well
used internationally and in such volumes that a large capital amounts can move
through the currency markets without disturbing the Yuan exchange rate. This
means that the Yuan must be readily available in large amounts in all the
international markets that China wants to see the Yuan traded in. What does this
China must release huge amounts of the Yuan into
international markets between now and 2010. This would require following a
similar route to the one taken by the U.S. $ from 1971 onwards, which led to the
$ being the most sought after international currency. With the U.S. in control
of the security of the biggest oil producing area in the world the lands
surrounding the Persian Gulf they ensured that oil was priced in the U.S. $.
This forced it into the coffers of every nation on earth. While China does not
have the same leverage, it does sell the cheapest and most sought after
manufactured goods everywhere. As Chinese expertise grows, their goods will take
a larger and larger path into international markets. Until the rest of the world
earns as little as Chinese workers do, the “China advantage” will assist in this
growing international presence. The threat to the $ is huge, because eventually
in almost every transaction where the Yuan will be used, it will replace the
This will leave a growing amount of the U.S. $ with nowhere to go but home.
If this happens, forget rising interest rates, even in the face of
But will they price Chinese goods in the Yuan and change their pricing from
the U.S. $? Yes, tentative steps are already being taken in this regard: -
1. Currency Swaps: China has issued large tranches of Yuan “Swaps” to a few
countries, including South America. This allows them to pay for Chinese goods in
the Yuan, while China can add foreign currencies such as the Reis to their
foreign exchange reserves. Like a movie being tested in a country town, the next
step will be to go global.
2. Loans to foreign banks in Yuan: The main exit point for goods from China
is via Hong Kong. Such loans are now being issued to Honk Kong Banks, where they
can be closely monitored from China. Likewise these are trial runs to remove
China uses Yuan through Hong Kong - for Trade only [at present].
Foreign banks will be able to buy or borrow Yuan from
Chinese mainland lenders for the first time to settle trade in Hong Kong and
Macau under a pilot scheme set up by the P.B.O.C. This is a prime step in the
international use of the Yuan. The People's Bank of China, fill permit foreign
banks to settle imports and exports in Yuan in Hong Kong and Macau and will
allow them to buy Chinese currency from mainland banks within certain limits.
The rules make clear that China will be checking to ensure that banks and
companies do not try to use the pilot program to get round the country's capital
controls. Exporters will be allowed to keep their Yuan earnings outside China.
Chinese banks will also be allowed gradually to extend trade finance in Yuan to
overseas companies, the PBOC said. The program will initially be piloted by
about 440 firms in Shanghai and the southern province of Guangdong.
Chinese export firms involved in the trial will continue to qualify for
export tax refunds.
Yes, this will increase the pressure on the Yuan to appreciate, but as we
said above, China wants the Yuan to be an international currency by 2010
so it must push a huge quantity of them into foreign markets. This can be
made to counter an excessive appreciation if enough Yuan are created
Additionally, we can be sure that in selling / loaning / swapping the Yuan, China will move to desist from accumulating more U.S. dollars than is
required for U.S. trade
. It will sell the Yuan for the currencies of its
Trade partners across the world. This will stabilize or lower the Yuan exchange
rate against these currencies, while placing some downward pressure on the U.S.
$ as its global reserve currency role wanes.
Eventually we expect even O.P.E.C. to accept Yuan in payment of oil!
The downward pressure on the $ is inevitable and we believe
such a depreciation has been accepted by the Chinese. The moves to resurrect the
S.D.R. are part of this acceptance and an attempt to avoid the $’s depreciation.
There will simply be far more U.S. dollars internationally than are needed, so
the only way to avoid suffering from the $’s fall is to diversify, via the
S.D.R. into other currencies. If China can replace the U.S. $ with newly
composed S.D.R.’s they can protect the buying power of their huge [$1.95
trillion] reserves, at least to some extent!
What will the U.S. do in the face of this? Will it act defensively ahead of
this? Is a devaluation of the U.S. $ about to happen? What will be the impact on
the gold market and price? Will governments do something about gold ownership?
We appear to be just ahead of major global currency market moves?
The U.S. $ in the near-term? / The affect on the Gold price and Markets!/
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