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Last night in Vancouver, my casual
sushi dinner for two came to CAD $81 (USD $84). Seven years ago, the same
dinner would have cost CAD $60 (USD $42). In Dollar terms, foreign goods and
services have more than doubled in price in fewer than seven years. This is
not some economic index based on hedonistic mathematical or substitution
theory, this is based on my hotel, taxi, and food bills from Bali to Bangkok, and from Toronto
to Rio.
Make no mistake, the
Dollar, with unlimited supplies, has an intrinsic value of zero. This fact
has been incessantly broadcasted recently by global banking figures as they
are ready to “inject” unlimited “liquidity”
to stave off any crisis ranging from the subprime
market collapse, derivatives, to recession. It is only natural that the price
of goods goes up when money is printed without abandon. And you wonder why
money aggregate figures are no longer reported by officials, citing cost of
compiling such data.
One can hardly understand
the real impact of a depreciating currency until he travels abroad. Given
that fewer than 15% of the US population
has passports, it’s no surprise that the alarm has not been sounded
loudly yet. Domestic price inflation on goods has been kept relatively at bay
thanks to a suppressed Chinese currency (RMB), however in my opinion that is
about to change.
Oil is an integral part of
our daily living, and the US
public often voice complaints about the high price of oil. However, many
overlook that just as much money is spent on Chinese made goods as is on
fuel, day in and day out.
Given the extent of the US trade deficit with China ($150
billion per year), there is no reason for RMB not to appreciate 50% against
the Dollar, which is what Euro and Canadian dollar did from their 2002 low
against the dollar.
So far RMB is up a modest
10%.
For a US family that spends $300 to
$500 a month on Chinese goods, a further 40% appreciation of the RMB will
translate into a $100 to $200 monthly cost increase. I spend at least $500 a
month on Chinese goods, and to me, the logic of asking the Chinese to revalue
their currency upwards is no different from asking the Saudi’s to jack
up their oil price further, which is no logic at all for a US consumer.
Holding Dollars is like
playing musical chairs. When the music stops, the one holding the most Green IOUs, loses.
- With a rapidly sinking Dollar vs. western
currencies, the Dollar’s supreme image is now very wobbly.
- Having built up a war chest of USD 1 trillion,
the Chinese need no more Dollars to shore up confidence in its own paper
within the international arena.
Combining these two
factors, the Chinese government will likely loosen the RMB peg to the Dollar
at a faster pace, and we expect a minimum of 20% appreciation in RMB over the
Dollar (i.e 5-6 RMB to 1 USD) in the next 12 to 18
months. Gold is international money, and will follow the RMB’s
suit and climb to over $1,000/oz over the same period. This gold target is a
conservative estimate given that other commodities from oil to copper have
all quadrupled from their lows this decade. Gold’s low was $250/oz in
2001.
Gold and the RMB’s rise will be the final chapter to the
Dollar’s status as the world’s reserve currency, and the end to
an era of low priced Walmart goods made in China.
Welcome to the American
Peso.
By :
John Lee, CFA
Goldmau.com
John Lee is a portfolio manager at
Mau Capital Management. He is a
CFA charter holder and has degrees in Economics and Engineering from Rice University.
He previously studied under Mr. James Turk, a renowned authority
on the gold market, and is specialized in investing in junior gold and resource
companies. Mr. Lee's articles are frequently cited at major resource websites
and a esteemed speaker at several major resource
conferences.
Please visit www.GoldMau for instant market alerts and stock updates.
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