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What the "Global Yuan" Means for Gold

Gold has been buoyed by the currency turmoil highlighted by China's state visit to Washington...


CHINA JUST made a 'State visit' to the US, and this time China got its state banquet too, writes Julian Phillips at the GoldForecaster.

This implies a changed attitude to China's regime by the United States' government. It is clear to all today that there is unlikely to be a real confrontation between the two nations anymore. If there were to be a war between the two it is most unlikely to be an economic/financial one, not a military one.

China is racing to be the number one economic world power and the US is retreating from that position, slowly but surely. Each day, the power of the US to dominate or even influence China falls slightly. Each day the power of China to influence and eventually dominate the global economy grows.

At this moment in time, China owns around half of the US Treasury's tradable debt. So Beijing is already in a position to hurt the US very badly, should it want to. But it is not in the interests of China to do that. China is empire-building and doesn't want to be distracted from that. They appear to be on a winning road already. China's is on the rising road and will soon pass the US going the other way.

We believe the advent of the Yuan as a global reserve currency marks the most significant event to appear on the global monetary scene. It overshadows the Eurozone debt problems because it will change the monetary world significantly. We don't believe for one second that the Euro will collapse. The Euro will receive considerable investment from China overtime at a time when it is needed most. China realizes that as an alternative to the US Dollar, the Euro is needed in the global monetary system. But by investing in the world's two most powerful trading blocs, China is gaining a foothold that may well swing the financial balance of power towards itself, in time.

Neither of the two competing blocs – the US or Eurozone – will be able to do without China's investments shortly. Such dependence protects China as much as it weakens the Eurozone and the US.

As to the threat of military action from either side, we believe that China will not even move towards a confrontation. Tacit support for South Korea and a withdrawal of support for North Korea against a considerable softening of US support for Taiwan may well be discussed in the visit of China to the US. Any confrontational moves may well be softened by the use of the United Nations as a mediator. The battle for power will be limited to the international trade and monetary scenes, we believe.

Senior US senators are meantime threatening to legislate against China's "management" of the Yuan. By now most of us see this as a display of testosterone and unlikely to sway China in the least. Chinese wages have to move to the same level as those of the US (whether by falling wages in the US or rising wages in China) before international trade is on a level playing field.

A change in the exchange rate of the Yuan to the Dollar is not likely to dent China's global trade competitiveness one iota. China has made it clear there will be no change in its stance. As we pointed out in our last article we expect to see a sufficient quantity of Yuan sent into world markets from China to hold it steady or weaken in a 'free float'. It is part of a very large global strategy unfolding now. To those who doubt this, ask yourself:

"If Chinese exporters price their goods in the Yuan or even in the other global currencies, what will happen to the Dollar?"

For a number of years now, China has been developing its gold market. Huge precious metals warehouses are now situated in Hong Kong next to its very efficient Airport there. Recently China expanded the number of gold importers permitted to import gold to China. China's banks have developed gold distribution centers throughout the major cities of China. The Chinese public can see the benefits of owning gold by the price rises it has seen in the Gold Price over those years. The government itself is accumulating its own local gold production as well as encouraging its citizens to Buy Gold.

If there was any intention of re-valuing the Yuan, then the Chinese public could well see this as a betrayal of investors by the government. No, we have no doubt that we will not see a rising Yuan. We have stood by this forecast for the last two years, in the face of foreign pressure on the Yuan to rise. Instead, we continue to expect the Gold Price to perform, in the Yuan, much as it does in the US Dollar now.

For that reason and because of the ongoing development of China and the growth of a huge middle class in China, for the foreseeable future, we see a steady growth in the rise of Gold Investments in China.

Whether it is the Obama Administration or any other we expect the change in attitude towards China by the US as being one where both seek mutually beneficial policies. Despite the change in the fortunes of the two nations, there will be a desire to quietly adjust to the situation by both sides. And these adjustments will be huge. Just as Britain in the last century started as the number one world power and had to slip well down the ranks, so the US will see the beginning of a similar process in the next couple of years. The greatest change in that process will be the shrinkage of the use of the US Dollar as the use of the Yuan grows rapidly.

To that end it is abundantly clear already that any opposition to the growth of the Yuan in global trade by the US will be disruptive and particularly harmful to the interests of the USA. As part of this process, it is inevitable that the US will not oppose the use of the Yuan as a petro currency, in sales of oil to China. We cannot see China accepting the pressure to keep using the Dollar to impact on its oil imports, just as it is now using the Ruble and the Yuan in its oil trade with Russia already. Be ready for considerable change in the future.

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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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