Currency War: China, the Dollar and Gold

 Tuesday, August 11, 2015

It is a strange feeling when you see things coming. Back in April we wrote a blog entitled, "China and Alan Greenspan - "Something Big is Coming." 

For the last two weeks we have written our blogs on the signs of an imminent economic collapse.  And several years ago, we also wrote of a coming currency war between China and the U.S. 

Well, today China surprised the world by devaluing its own currency!  This effectively brings together all three of the above elements; the collapsing of fiat bubbles, the rise of gold and the attack by China on the Dollar:

"Gold rose to a three-week high on Tuesday (today) as the Dollar reversed gains, global stocks fell and investors assessed the impact of China's move to devalue its currency and prop up its economy.  Beijing allowed the Yuan to fall to its lowest level in nearly three years....Spot prices rebounded to a three-week high of $1,119 before trading up 0.3 percent at $1,107.31 an ounce by 1340 GMT. Gold is benefiting from fears that this is a new round of 'currency war'," Macquarie analyst Matthew Turner said, adding that the move increased uncertainties and risks about the global economy, which tends to be good for gold....The metal had gained around 1 percent on Monday on Dollar weakness, after comments from Federal Reserve officials raised uncertainties about a September rate hike." (Reuters)  

Later in the above Reuters piece, the writer states that this move of China, "does not add to gold's attractiveness in China and it doesn't increase the safe-haven status."  I would disagree with this statement and find it an odd juxtaposition against the actual evidence. This is because many commentators believe China's surprise devaluation of its own currency is an attack on the Dollar, which by definition is very good for gold in the long run:  "China surprised the world on Tuesday, announcing it would devalue its currency in a move likely to boost Chinese exports and support the country's flagging economic growth. The change to the currency's value was the most dramatic in two decades.  The move is likely to stir intense concern, as political leaders, especially in the United States, have long complained that China leaves its currency at a lower value to boost its domestic industries.  In recent years, China has worked to let the value of the currency, known as the Yuan or Renminbi, rise, but the announcement by China's Central Bank on Tuesday is sure to reignite debate over whether the country is giving an unfair advantage to its businesses." (Washington Post)  "Now, market forces could pressure the currency to depreciate rather than appreciate, making Chinese products comparatively cheaper. Analysts from Citi said in a note Tuesday that they expect the rule change to mark the beginning of a measured currency depreciation. In China, the depreciation will be a boon for exporters and heavy industry, but bad news for companies that depend on imported goods." But as we all know, China is the king of exported goods, so this is a clever move. Also, I am of the belief, based on evidence, that China does not want to expose its hand that this is the case:  "Chinese Central Bank argued on Tuesday that its goals were more mundane than spurring exports and growth. Rather, the bank said that the change was a one-time event to allow it to set exchange rates in line with free market practices." (Washington Post)  So, if this is what China is saying, I believe it is prudent to assume this is NOT the reason but that the opposite it true. Why? Because of Gold.

We recently reported on China "declaring" their Gold holdings last month. We, like many others, believed these figures were false. ZeroHedge agrees:  "In July, the People’s Bank of China reported that it has added more than 600 tons of gold bullion to its stockpiles since 2009, taking the total to 1,658 tons. That represents a 60% jump in gold assets in just six years.  In fact, all of that new metal was added to the Central Bank’s ledger in June 2015.  With gold prices down in June, there's no way the actual buying had occurred then. It appears Central Bank officials simply moved that metal over from the books of China's state-owned banks which can hold metal secretly.  So that’s just what the Chinese are reporting officially. Unofficially, according to MarketWatch columnist David Marsh, “China probably has a lot more gold than it admits.” That’s because the Chinese government regularly acquires gold directly from China’s mining industry.  The transactions are settled in Yuan rather than Dollars, so most or all of these “internal” gold purchases can avoid showing up as foreign reserve assets.  In examining gold flows into China as well as Chinese gold production, some experts believe that China actually holds more than 10,000 tons of gold, not the “paltry” 1,658 tons the People’s Bank of China is disclosing."

It seems perfectly logical to assume that a country that is dishonest about its Gold holdings will also be dishonest about its reason for devaluing its currency. So, why would China say one thing but do another? Humans and cultures often project their own motives onto others. If they are honest, they project this honesty onto others. But this often leads to naivety. Ignoring our inbuilt British value system and looking at these Gold figures logically, it becomes clear why China would under-declare its Gold holdings and we examined this reasoning in our recent blog, "Is a Stock Market Crash coming in late 2015?" (22 July 2015)

"If you had the means to acquire hundreds, or even thousands, of tons of gold, you’d want to do so as stealthily as possible in order to avoid tipping off the market.  If your strategic objective was to dramatically boost gold reserves over a period of several years, you wouldn’t want to see the price rise – at least not while you’re still accumulating. And if you had no ethical qualms about interfering in the market, you’d want to rig prices lower so you could obtain more ounces. Recently, in an effort to prop up the stock market, they tried to forbid people from selling shares of stocks. How heavily involved China is in managing the gold market is impossible for an outsider to know. But there is plenty of evidence to suggest that China is covertly buying gold while dumping U.S. Treasuries. JP Morgan analyst Nikolaos Panigirtzoglou calculated that China’s foreign exchange assets got depleted by $520 billion over the past five quarters. Most of that $520 billion in paper asset dumping comes, presumably, from China’s massive holdings of Treasury securities." (Tyler Durden)

In other words, quietly dump the Dollar from your reserves and quietly acquire Physical Gold is China's gameplan. And why would China do this? Because China wants to be the new super-power. It is a classic currency war against the Dollar, with Russia and China in a waltz together against the U.S.: "Chinese officials aim to ultimately challenge America’s standing as the world’s superpower. That’s why they’re forming a strategic alliance with Russia, an adversary of the U.S. That’s why both the Russian and Chinese Central Banks have quietly emerged as the world’s largest gold buyers." (ZeroHedge)

Here are some interesting facts on Gold, when looking specifically at the U.S., Russia and China:  "Russia has one-eighth the gold of the United States. It sounds like they’re a small gold power — but their economy’s only one-eighth as big. So, they have about the right amount of gold for the size of their economy.  The U.S. gold reserve at the market rate is about 2.7 percent of GDP. That number varies because the price of gold varies — but it’s around 2.7 percent. For Russia, it’s about 2.7 percent. For Europe, it’s even higher — over 4 percent.

In China, that number is 0.7 percent officially. Unofficially, if you give them credit for having, let’s say, 4,000 tons, it raises them up to the US and Russian level, but they want to actually get higher than that." (James Rickards)  Many commentators believe China has more Gold than that already. He continues in his fascinating article by saying, "The evidence is there. China is saying, in effect,  “We’re not comfortable holding all these Dollars unless we can have gold.  But if we are transparent about the gold acquisition, the price will go up too quickly." But he concludes with the same conclusion we have reached at Bleyer for years, that "the point is that is that there is so much instability in the system with derivatives and leverage that we’re not going to... have a happy ending.  The system’s going to collapse before we get from here to there. At that point, it’s going to be a mad scramble to get gold."

The commentators and major news outlets are buzzing today with questions at this shock devaluation of China of its own currency. That a country would choose to devalue its own money, something that Greece has been battling so hard not to happen, strikes many in the Western mindset as completely puzzling. Wall Street Journal headlines today with, "Shockwaves from China’s Yuan devaluation will be felt by all kinds of investors, and will likely prompt questions from U.S. politicians."  

Instinctively, the U.S. knows this is aimed at them.

"The engineered fall in the Yuan is likely to cause political ripples around the world. In particular it may reignite criticism of China’s tight control over the Yuan’s exchange rate within the U.S. Congress and some American businesses, which have long said the currency was already too weak and set at a rate that allowed Chinese exporters to sell their goods artificially cheap on world markets. (Lingling Wei, WSJ)" This move of China's has hints of ancient acts of falling on one's sword in order to save honour, and create a greater victory later on. If anything, it shows me how serious China really is about moving themselves slowly but surely into position to challenge the Dollar while amassing Physical Gold (and Silver).

Lingling Wei of the Wall Street Journal concludes that, "The news comes weeks before China’s President Xi Jinping is due to visit Washington for a summit with U.S. President Barack Obama, who has resisted calls to describe Beijing as a currency manipulator during his time in office but is now likely to face new pressure on the currency question. China’s decision to allow the Yuan to depreciate is likely to create an outcry in Congress as the presidential-election season heats up, said Conference Board economist Andrew Polk. 

The other notable point of this "surprise" announcement by China today is the timing! The Fed were soon to be meeting to announce a long-awaited interest rate hike, a potential first in over nine years! "China's surprise devaluation of its currency is an admission of economic weakness and could delay the timing of the Federal Reserve's expected U.S. interest rate hike, strategist Boris Schlossberg told CNBC."   Amazingly, just yesterday - a day before China's surprise devaluation of the Yuan - Warren Buffet, said of the Fed's rate hike, "It may very well happen [in September], but I don't think it's an easy decision when rates are considerably lower in Europe, and you may be affecting imports and exports," he said. It's not just Europe. As we highlighted over the weekend, some economists including Goldman Sachs' David Kostin point out that weakness in China may postpone the first rate hike in a decade. (Business Insider)  

It's almost like he saw that coming!  We wrote of Warren Buffett being one of the major market players to be warning of a coming stock market crash, while dumping stocks, only last month and it looks like he's on the money once again, with regards to the Fed, interest rates an

d China. All of which points to the wisdom of owning Physical Gold and Silver.

Back in June, Yellen (Chair of the Federal Reserve) gave a prepared statement, "Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy." (CNBC)  

To put all this into perspective, and as stated, this would have been the first rate hike in nine years. Now, this - some may say - gutsy move by China calls that U.S. rate hike seriously into question. And if the U.S. cannot raise its interest rate, it cannot even begin to normalise its own monetary policy.  It all seems like watching a large, very calm collected chess game, with China just today quietly saying, "Check."

"What is of interest is how the U.S. will react to this move. It will almost certainly cause Janet Yellen and the Fed more problems and could possibly kill off the September rate hike, as any further gains by the U.S. Dollar could cause more problems for the U.S. economy... . It is clear that the ‘currency war’ is back, which will make the next few weeks very interesting.” — Nour Al-Hammoury, chief market strategist at ADS Securities." (Market Watch)

We'll quote Tyler Durden of ZeroHedge to conclude: "As the saying goes, “Gold goes where it’s most appreciated.” Whether you’re a Communist or a capitalist, whether you speak Mandarin or English, gold remains the one permanent, immutable common denominator. Gold’s value has been recognized universally for hundreds of years and will continue to be recognized universally regardless of whatever market gyrations or economic or political strife the future may bring.

Please browse our Gold and Silver sections of the website and contact us soon to take advantage of what we believe are pre-stock market crash prices in precious metals.