Printer Friendly

eMail Article

November 20, 2006

China Diversifying to Lessen the $' Reserve Currency Role
by Julian D. W. Phillips

From www.silverforecaster.com 20th November 2006

With gold leading silver along by the hand, we feature this week's article on China and its burgeoning reserves problem, which we believe will be the most significant event in the global monetary system ever to affect both gold and silver. Indeed if it continues to grow in influence on the value of the $, it may well be that silver begins to be treated as a monetary metal at some point in the future.

Invoicing in other currencies
The simplest way to slow down the rate of accumulation of the U.S.$ in Chinese reserves is to insist that companies invoice customers in their own currencies only. So when Argentina or South Africa wants to buy goods from China they will be allowed to pay in Pesos or Rands. Ask for a price from a Chinese company at the moment and you can be sure that you will be quoted in the U.S. $. If they were to ask what country you came from then accepted your currency [as well as the U.S.$], then they would receive the currencies of all those that trade with them. Then at some time in the future they can pay for imports in those currencies. Meantime, the countries from whom they import will still accept the U.S.$ in payment for imports. Diversification is then achieved and without entering those markets which will rattle the exchange rates.

But the U.S.$' left unused after that in the international monetary system will then wash this way and thus lowering the $' value as they become excess to requirements. As in the case of Britain, the drain of capital investment will be like a tsunami hitting the state international trade. The only way they could retain their value would be for the U.S. authorities to mop these up, bringing this liquidity back to Treasury instruments and the rest. But the sheer volume of these excess $' will prove far too great for such an exercise and will send inflation racing and interest rates trying to keep up.

Threats to global trade stability
As this happens, other holders of the U.S. $ will be forced to follow the Chinese to attempt to retain the value of their reserves through diversification too. The $ will be dropping like a stone at this point. It is then the U.S. will have to decide whether or not too impose Capital Controls.

At this point oil producers will be forced to follow the same route of accepting other currencies for their oil or simply raising prices to compensate for a falling $. This will exacerbate U.S. inflation enormously.

Those nations dependent on the U.S. for their trade will follow suit or lose their competitiveness as U.S. goods cheapen at the net rate of inflation minus the exchange rate fall against their currencies.

There will be rising confusion in international trade as exchange rate moves destroy stability in prices. The wounds such an event will produce in the international monetary system will be catastrophic and precipitate precious metal prices we currently may think impossible.

And the Trade deficit will continue until growth and import demand are slowed considerably, or measures are taken by the government to slow them down.

As to financing the Trade deficit, it would be most surprising if there were any [except the closest of unwise friends] nations willing to finance the deficit anymore.

Is this diversification from the $ a near term likelihood? Yes, it is for China which will diversify its $1 trillion foreign exchange reserves, the largest in the world, across different currencies and investment instruments, including in emerging markets, Chinese central bank Governor Zhou Xiaochuan said last week.

Chinese reserves are about 70% in U.S. debt securities. "(Diversification) includes currencies, investment instruments, including emerging markets," said Zhou. He then confirmed that "We do not have any new preparations for selling any currencies." China has to diversify as its future as the leading global manufacturer is pointing the way to the Yuan fully convertible at some point in the future in future. Zhou said that a mushrooming trade surplus meant China needed stronger policy adjustment both on the Yuan and through boosting internal demand. But he said any changes to the Yuan would be gradual to avoid unbalancing the domestic economy.

China has allowed the Yuan to appreciate 2.1% since last July only. "The reason why we adopt a gradual approach for exchange rate reform is because China has a very large amount of labor working in the trade-related sector," Zhou said, "So we have to consider this. We should avoid too much or too sudden closing-down or bankruptcies of enterprises and laying-off of workers. We are trying to manage to adjust the balance of payments and meanwhile to keep domestic economy in the good (state)."

China is growing at its fastest pace since 1995, but Zhou expressed satisfaction that the pace of growth was easing from the first quarter's 11.3%. "It has already slowed down to some extent so we have reached the expected result of macro-economic adjustment," he said.

HIGHLIGHTS in "Silver Forecaster"
Market Forecasts / Metal Stocks - HUI / Commodities - CRB / Silver / Platinum/ Speculative Fund Activity
China Reserves Diversification/ The importance of Marginal Supply/Demand in Currency - Oil - Gold - Silver Market
Silver Technicals / New Applications for Silver / Silver Trust activity / Gold: Silver Ratio / Silver Portfolio / Silver Share Technicals
Platinum Technicals / South Africa Platinum Producer/ Johnson Matthey Report / Leeuwkop Platinum Mine

Do you want to receive your own copy of Article from "Gold or Silver Forecaster"? - Send your e-mail address to: gold-authenticmoney@iafrica.com.

Subscribe to "Gold Forecaster - Global Watch", through: www.goldforecaster.com.

Julian D. W. Phillips
Gold-Authentic Money

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price. FIND OUT MORE

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-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips 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-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Gold-Authentic Money / Julian D. W. Phillips 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, we 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.

You should be aware that the Internet is not a completely reliable transmission medium. Neither Gold-Authentic Money / Julian D.W. Phillips nor any of our associates accept any liability for any loss or damage, including without limitation loss of profit, which may arise directly or indirectly from your inability to access the website for any reason or for any delay in or failure of the transmission or the receipt of any instructions or notification sent through this website. The content of this website is the property of Gold-Authentic Money or its licensors and is protected by copyright and other intellectual property laws. You agree not to reproduce, re-transmit or distribute the contents herein.

Copyright © 2003-2008 Julian D. W. Phillips

Image rendition and html coding Copyright © 2000-2008 SafeHaven.com

« BullionVault.com -- Buy gold online - quickly, safely and at low prices »
« Honest Money: A History of U.S. Gold & Silver Currency -- by Douglas V. Gnazzo »

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »