Four-figure gold looks certain now the future of the monetary system looks so bleak and extreme...
FOR SEVERAL YEARS we have now been warning of the demise of the US Dollar as the globe's No.1 reserve currency, writes Julian Phillips of the GoldForecaster.com.
The threat is not so much that the monetary policies of the US are cheapening the Dollar, much as they are; but more that these policies are pressing other nations to seek ways to avoid using the Dollar in their international dealings.
China has now taken a momentous, structurally adjusting step to change matters in their favor. It's crucial that investors – whatever their main denominated currency – understand the implications.
Approximately 75% of global trade today is denominated in the US Dollar, but the bulk of international trade transactions have nothing to do with the United States directly. The volatility of the Dollar has distorted and damaged this "Dollar-priced" aspect of global trade, creating an ideal environment for hard asset investments such as Gold Bullion to rise. And having been cornered by the sheer percentage of US Dollars in their foreign exchange reserves (every nation has this problem), the Chinese are at last moving to make their own currency, the Yuan, a reserve currency.
The credit crunch and global policies taken to rectify it have triggered these actions by the Chinese. And the arrival of the Yuan as a global currency will reduce the role of the US Dollar in global trade far more significantly than did the Euro – an up and coming global reserve currency that failed to threaten the almost imperial dominance of the Dollar.
We believe that the recent moves to introduce the Yuan across the globe will shrink the use of the Dollar in global trade, and not simply because Chinese exports can be directly priced in the local currency. With the United States in a slow-motion decline economically, we will also witness a fragmentation of world monetary power. In such a climate, and even with the Yuan gaining ground, physical gold will be yet more attractive again as a long-term investment, and as a "last resort" protection against the uncertainties and strains this shift will cause.
Gold Investment will also become a more vital hedge against local currency volatility. For as the Yuan appreciates against the US Dollar and other currencies as a consequence of these changes, even the Chinese will find gold more attractive as part of the 'basket' in which they hold foreign currencies in their reserves and personal portfolios.
Will this rise in Gold Prices, alongside its rising importance, bring about a ban on Chinese exports of gold? It is more than probable at some point in time. Already the Chinese central bank has begun adding gold to its reserves, buying gold directly from local pit-heads (it is now the world's No.1 Gold Mining nation), thus side-stepping and also restricting supply to the international market.
Without the world's import/export trade or foreign currency reserves to dominate, where will all the Dollars pumped out by the US government and consumer go? We fear they will have to go home, back where they will add to the massive recent issues of dollars and will precipitate inflation dramatically, once the process is really underway. Bear in mind that it is not only the Chinese who will reduce their use of the Dollar; all nations with an overexposure to the Dollar in their reserves will leap at the chance to reduce this percentage and introduce the Yuan to these reserves as a replacement.
It is a major structural move that is part of the process of Dollar de-colonization. It is likely that even central banks will appreciate gold in their reserves again. This will result in a cessation of "official" gold sales (such as undertaken within the Central Bank Gold Agreement) and even the accumulation of gold in central bank reserves in an increasing number of countries.
Already acting to make the Yuan global, China has agreed a 70 billion Yuan currency swap with Argentina that will allow it to receive Renminbi (another name for Yuan, analogous to "Sterling" for British Pound) instead of US Dollars for its exports to the Latin American country.
Beijing has also signed 650 billion Yuan ($95 billion, €72 billion) worth of deals since December with Malaysia, South Korea, Hong Kong, Belarus, Indonesia. This program, since joined by Argentina, forms an attempt to unblock trade financing that has been severely curtailed by the crisis.
What's more, the Chinese government has also permitted five major trading cities to use the Yuan in overseas trade settlement. This is a very important step towards the establishment of the Yuan as a global and reserve currency.
Shanghai, Guangzhou (the old Canton), Shenzhen, Dongguan, and Zhuhai have been designated for this purpose. Concentrated in the South, these Pearl River Delta cities are the spearhead of Chinese exports and already developed to the extent that even the most high tech of products is rapidly approaching international standards.
The Chinese government has watched with deep concern the prospect of it export surpluses (held in the US Dollar) move to the point where their buying power will drop heavily. On the horizon sits the prospect of the US Dollar being used in as one of four or five global reserve currencies and not as the dominant one. Understandably then, the Chinese government is taking steps now to reduce the risk from exchange rate volatility and the prospect of the US Dollar's buying power falling. With China's growth to a global economic driver, these moves had to come in time and that time is now.
Consistent with these moves will, eventually, come the 'floating' of the Yuan, so that a break in the current managed float of the Yuan tied to the Dollar will allow a separation of the Yuan from the US currency. This will only happen when the Chinese are convinced that the move will not damage the international competitiveness of China. The hoped-for stability that this brings with it will allow Chinese international trade to improve and will cause an appreciation in the international value of the Yuan. The central bank of China is likely to use this appreciation as an opportunity to diversify away from the US Dollar, export the Yuan and bring in currencies that accurately reflect the spread of international trade the Chinese have at present.
This would reflect the decades-long Japanese policies of exporting goods when the Yen is cheap and exporting capital when the Yen becomes expensive.
The likely impact on Gold Prices? While market attention has been riveted on the price of gold, a more important feature of the gold market has caused gold to evolve as money, in increasingly difficult times. The concerns of the Chinese are the concerns of all investors – particularly US investors, the main buyers of gold shares in the gold Exchange Traded Funds (Gold ETFs). Consequently, this has broadened the base and improved the quality of gold investors worldwide. While the jewelry trade has retreated from gold and scrap sales have supported the supply of gold, the time is coming when supplies will just not be enough to satisfy investors and scrap sales fade.
The only way such investors will be deterred from buying then is a Gold Price rising out of their buying zones. This will certainly mean an over four-figure gold price.
The fears of investors are outside the gold market and concern exchange rates, massive tsunamis of dollars and other currencies being printed to shore up the present system in the grips of a credit crunch. Many investors are certain inflation is roaring towards us, to spring up, as deflation is overcome. The future of the monetary system is bleak and extreme.
Locally, gold is priced in home currencies and serves as a hedge against the dramatic moves of each currency. And rapidly today, investors are seeing that their price of gold doesn't reflect only the value of gold, but the value of their local currencies as well. Awareness of gold as a protection against weakening currencies is growing fast.
This awareness is also growing amongst central banks, sovereign wealth funds, institutions, wealthy individuals and is now spreading to the man in the street. Once sound money backed by assets was forsaken in favor of man managed and created money, the disintegration of the banking system, the credit system and confidence in currencies and economies became a genuine and ever-present risk that we're now facing full on. For as former Fed chairman Alan Greenspan wrote four decades ago, long before managing the currency inflation we're now sufferig the effects of, "Without a gold standard in place, there is little to prevent governments indulging in wild credit creation. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process."
We do not believe there will be a Gold Standard because it is anathema to all bankers, central bankers included. What is likely to happen is that a formula will be worked out where gold can be used to increase the credibility of and confidence in paper money again. Before that discussion comes to reality, however, individuals and institutions will turn increasingly to Gold Investment. When governments contemplate gold's use in money again, you can be sure they will want the metal to themselves.