What happens to Gold Investment if the Yuan is allowed to rise vs. the Dollar...?
The CHINESE GOVERNMENT is encouraging its citizens into Gold Investment, writes Julian Phillips of the Gold Forecaster, and is working to expand the range of gold products available.
Yet the United States government – and others – believe that Beijing will also allow the Yuan currency to appreciate. Surely the Chinese investor will be hurt if this happens?
We know the Chinese government has been adding to its official gold reserves for at least six years now. Local Gold Mining production is not leaving the country, nor will it for many years to come. At the same time the Chinese government favors the development of new Gold Investment products, opening up local gold markets and encouraging the major Chinese banks to sell gold across China.
This is a particularly important development for the global gold market in the light of the fact that per capita, the Chinese hold the least amount of gold amongst the Asian nations. The savings propensity of the average Chinese earner is remarkable, for they save around 40% of their disposable income. To date these have been held on deposit at the banks, with the more sophisticated venturing into the equity markets there. But in times of volatile 'spikes', these can behave more like gambling casinos than investment sources.
Gold in the Chinese mind represents true value and leads to financial security. Consequently, the potential for Buying Gold in this nation of 1.4 billion people – now in a rapid process of financial empowerment – is tremendous and could well, in time, make China one of if not the most important investment markets for gold.
The main restraint on Chinese gold buying, whether by individuals or the government, is the small size of the global gold market. Persistent long-term buying is the only way the acquisition of large quantities of gold can be approached. Higher prices over time may well flush out sellers of gold. So we expect Chinese gold buying to remain persistent for the foreseeable future.
For years now, however, the US in particular has been calling for an appreciation in the Yuan. Even the International Monetary Fund (IMF) has told Beijing that it is in the interests of China to let the Yuan appreciate. But no heed has been taken of such demands. Yes, the Chinese have allowed the West to get the impression that they may well let the Yuan appreciate, but a look at the advantages to China of a pegged Yuan to the Dollar tell us another story.
The original reason for the pegging of the Yuan to the US Dollar was to capture the price advantage Chinese goods had over the equivalent products made everywhere else. As the Dollar is the global reserve currency, such prices were easily translated into other currencies. As we see by this week's export report for May from China, the rise of 48% shows what advantages such pegging and pricing brings as the world slowly recovers. Yes import could be cheaper, but that would only save money not promote industry. After all China wants and needs to develop its economy.
We have been touting the future role of the Yuan as a global reserve currency for well over the last two years now. Since then we have seen the tentative steps that the Chinese need to take to ensure their banks can cope with this changed structure. Since expanding Yuan trade in just Hong Kong, it is now spread throughout the main manufacturing hub of Southern China. When they are ready, we do expect to see a flood of Yuan to all their international trading partners, to pay for imports and then to make Yuan available to pay for Chinese exports. As Chinese trade is already global, there will be a point when Chinese importers will price imports and exports in the Yuan. While this process is in transition, we also expect their pricing policies to widen to include allowing payment for Chinese exports in the broad spectrum of global currencies. This will allow China to diversify its reserves and lower its exposure to just the Dollar or the Euro.
When the internationalization of the Yuan happens there would normally be a tremendous fall in the value of the Yuan as it floods markets, but in today's context that fall would be absorbed by the pressure for the Yuan that is now being experienced. When it does happen, we believe that China will want the Yuan to either hold current levels of in fact fall.
Having said all the above, we have to ask you if you expect the Chinese government to promote Gold Investment so strongly to its citizens, then knowingly engineer a fall in the Yuan price of gold? Our view is that the Chinese government would not wish to hurt its own like that, but with a large dose of forethought, would have blended to two policies to the benefit of its own citizens. If they didn't what would happen to Chinese gold demand.
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