Gold News

The Coming Flood of Yuan

Chinese gold demand also set to surge as Yuan currency goes international...

WHILE CHINA is taking a greater portion of our financial attention on a daily basis, it seems to us that the sheer size of China and its continued growth has not been factored into the world economic perspective, even now, writes Julian Phillips at the Gold Forecaster.

One of the consequences of profit-driven capitalism in the past was the relocation of manufacturing from high-cost, developed countries to the lower cost country of China. US corporations that did that, have enjoyed better-than-ever profits, but in the process have educated new, Chinese, lower-priced competition that will overwhelm us all in the future.

The enrichment of China and its arrival on the world scene will surpass the US as the largest world economy by 2020 at the latest (we would not be surprised if this happened even before 2015). This will trigger a financial tsunami that will change they way we think and invest.

We here at the Gold Forecaster have been following the steady progress of the internationalization of the Yuan since it began. The goal that seems likely to be reached sooner rather than later will be for the Yuan to be a competing global reserve currency. Effective immediately, Bank of China's US individual customers can now open a Yuan denominated savings account with a $500 equivalent minimum balance. The bank also offers certificates of deposit in 6-month and 1-year terms with a minimum of $1,000 equivalent.

Now watch the rush. We don't believe that those who do it hoping to experience an appreciation of the Yuan will see that. But such investor objectives will create a huge demand for the Yuan.

For interested readers, the account opening procedures are simple-- there is an application form, a W-9 tax form, and a signature card. Applicants are also required to provide a government-issued ID and one other form of identification such as a credit card, employee ID card, insurance card, etc. You do have to show up in person. Businesses can also open Yuan accounts with a $5,000 equivalent minimum and requisite entity paperwork like Articles of Organization, etc. At this time, Yuan cash cannot be withdrawn from the account. The bank does provide currency exchange services between Dollars and Yuan at its Chinatown branch in New York; current limits are up to $4,000 per day, and $20,000 per year.

China is doing this as part of a long-term plan to make the Yuan become a fully-convertible competing global reserve currency. Many sovereign nations are holding Yuan in reserve instead of just Dollars, and Chinese cross border settlement is now frequently being transacted in Yuan instead of Dollars because of new clearing and settlement platforms that have been established in Hong Kong. After Yuan exchanges are established in the US, Europe will be next. Then as we forecast, China will price its goods in the Yuan and then pay in Yuan.

Please note that each seven Yuan purchased will replace one US Dollar on the international foreign exchange. Each contract priced in Yuan will replace the previous use of the US Dollar in those transactions. We believe the change will be rapid now. The belief that the Yuan should be stronger than the Dollar and will be some day will accelerate the move to the Yuan. The potential switch will look more like a tsunami than a flowing tide. The concept that this will take a decade is far off the mark. China must have prepared itself for this day very carefully and prepared its banking system for this flood to swamp the world's foreign exchanges. Do not be surprised if by next year we will all be familiar with the Yuan in our own lives.

Taking this further, the impact on the US Dollar exchange rate has to be bad, for the Dollars no longer used in international trade will come home and add to the home money supply. Maybe there will be no need for QE3? As to the growth of the Chinese foreign exchange reserves, the more the Yuan replaces the Dollar, the slower the flow of Dollars into Chinese reserves. It won't be a huge step for European trade to by-pass the Dollar either. We believe that the attrition, the real reduction of the role of the US Dollar as the sole global reserve currency, has now begun! Brace yourself for a major set of changes in the global economy going forward.

There are many ramifications that we have not covered here, because of lack of space, but will cover in our newsletters for subscribers in future issues. In particular, we have previously discussed the way Chinese gold demand will impact the Gold Price via imported gold. Even we have underestimated that demand. Right now, the demand for physical gold in China is surging. The premiums for Gold Bars for spot delivery jumped to their highest levels in two years there.

China is also experiencing food inflation in particular, as well as rising levels of general inflation. If this is a consequence of urbanization taking productivity away from the countryside, we expect the government will rectify that quickly without using monetary means. But overall gold demand is not a response to inflationary pressures there, but the rising capacity as well as rising numbers of middle class investors turning to one of the two prime investment mediums, bank deposits or gold. We expect this to rise rapidly in this country of 1.4 billion people who are rapidly being enriched.

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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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