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China & the Gold Price

How will China's new Yuan policy affect the currency and gold markets...?

With CHINA dropping its 'peg' to the US Dollar, the financial world is expecting the Yuan to appreciate up to 30% over time, writes Julian Phillips at GoldForecaster.

But we don't expect this at all. China has interests and will do no-one any favors unless they are in China's interests. There are some who say it is in China's interests as they may well need to cap rising inflation or cheapen imports. But China is a very different economy to any in the West and economic rules that apply to the West have to be modified in the East. So, what will happen to the Yuan now?

First, what was said by China? A narrowing balance-of-payments gap indicates that there's no basis for "large-scale appreciation" by the Yuan, the Chinese central bank said. The Chinese version said no "large-scale volatility" was wanted, and continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. It ruled out a one-time revaluation, saying there is no basis for "large-scale appreciation", and kept the Yuan's 0.5% daily trading band unchanged.

Today (Monday) it moved from last weeks Y6.8160 to Y6.7980 per Dollar, as a reaction to the news and the latest Yuan daily fix by the central bank. Why the rise? "The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability," the People's Bank of China said, which is one way of describing China's inflation rate jumping to a 19-month high of 3.1% in May, and China's overseas sales jumped 48.5% in May from a year earlier.

"It is desirable to proceed further with reform of the Yuan exchange-rate regime and increase the Yuan exchange-rate flexibility. Chinese companies will have time to adapt to Yuan changes and the bank reaffirmed a government policy of 'gradualism' in exchange-rate reform. Increased Yuan flexibility and 'two-way movements' by the currency will aid management of the economy..."

There is very little here to suggest a big appreciation. But there is a great deal here to suggest a nearby move in the internationalization of the Yuan! The scope of conjecture that comes out of such a statement could point to many avenues of development, but all point to the arrival of the Yuan on the international scene.

The benefits, as argued in the media, could be strong for sure. But all tend to look to the benefits that the States and other countries would enjoy, as a reason for such opinions. Now stand in Beijing and place yourself as head of potentially an economy equal to that of Europe and Asia put together. You have the potential for huge unrest inside this burgeoning economy as the poor 'have not' look at the new 'haves' and want some of the action.

This is a fear of central government and one that they are acting on. They want development to spread right across China. They will harness all facets of their country to achieve these objectives. They do have considerably more power to reach this gold than any other government on earth. So when they say that they, "it is desirable to proceed further with reform of the Yuan exchange rate regime and increase the Yuan exchange rate flexibility..."

We believe that there is far more to this than simply releasing the exchange rate. The pressure from the US on the exchange rate will perhaps accelerate the process of internationalization of the Yuan, but with it should come with a lot of downward pressure on the Yuan.

And having said all the above, we have to ask you if you expect the Chinese government to promote gold so strongly to its citizens, as it has done, only then to engineer knowingly a fall in the Yuan Gold Price...?

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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