Gold, Sdr and China

di Walter Snyder, Swiss Financial Consulting

It all hangs together. Recent newsletters have referred to gold, China, SDR, the US dollar, debt, trade deficits, commodity prices, emerging markets and market manipulation.  It is a prime objective of the Fed and Treasury to keep the dollar in its present position, and this explains the manipulation of the gold price. The US dollar is the fiat currency par excellence and is supported by trying to knock out gold as a reserve currency. The Americans have greatly benefited from having the US dollar as the most important global reserve currency, having had for years tremendous current account trade deficits. They caused the great recession of 2008 and tried to mend it with QE and historically low interest rates.

What is sure is that China wants the yuan recognized as an SDR global reserve currency, and we can expect a further loosening up of controls in order to make the yuan more palatable to the IMF as a convertible currency. The Americans will oppose admitting the yuan to the Club even though one can reckon that it will be the main currency behind the NDB and AIIB. It is not clear how much gold the PBoC has in reserve, and the Chinese will choose when they unveil the mystery. This might be before the meeting of the IMF in the autumn in order to support the bid to make the yuan an SDR currency.

Silver may make a comeback. Mexico is experimenting with silver coins and JP Morgan is buying huge amounts in the market. Will silver along with gold regain its position as a currency reserve to back up fiat money?

How will the PBoC dispose of all its dollars? The dollar is now stronger in Forex markets because of expectations that the Fed will raise interest rates, but the stronger the dollar becomes, the more difficult it will be for American companies to export products made in the USA and these companies will make less profit from their operations outside the USA. If the Fed does raise interest rates, the recovery might be quashed while making it difficult for the Treasury to service the national debt, which is over 100% of GDP. If the PBoC starts selling lots of Treasuries, the dollar could lose value, and that means Chinese reserves would lose value. The PBoC will convert dollars to gold only gradually, assuming that the Chinese want to appear to act responsibly so as to have the yuan approved of. The dollar will start to weaken when the IMF accepts the yuan as a SDR currency and fall further when implementation begins in January 2016. Smart investors will be out of dollars and US equities before that and in European equities and yuan-denominated securities.

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