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There is palpable anger in the U.S. over
the current ‘peg’ of the Yuan against the Dollar.
Despite promises that the Yuan will rise, it remains close to where it was
before China commented on its impending rise. Accusations of
currency manipulation are again about to be leveled at China. The
Chinese government must be thinking very carefully about the behavior of the
Yuan in the days to come. In the face of U.S. anger, will the
Chinese let the Yuan rise? With the government encouraging
Chinese investors to buy gold and developing the Chinese gold distribution
system, will investors feel if the Yuan were to rise 20% - 40% against the
Dollar while gold falls by the same amount inside China?
Government encourages gold buying
We ask you to look at the accompanying table of China’s
Household Gold Savings against Annual household Gold Savings
again. From this table, you can see just how important gold is to
the Chinese. Despite disposable income growth of approximately s
15% annually since 2000, consumption growth in the China’s economy
"is anemic", but private Chinese gold demand has risen 26% annually
by volume in the last decade, drawing a still-greater share of the newly
retained wealth. This
demand is nationwide and set, not just to grow, but to
burgeon.
At the same time the Chinese government has allowed more banks
to import gold and to distribute and sell gold. The country
is developing at double-digits growth. It’s urbanizing with
infrastructure springing up across the entire nation and with it the gold
market. The Chinese government is very conscious of keeping their
people happy as this growth takes them up into a new world.
What will a 40% rise in the Yuan: $ exchange rate do to the
Yuan gold price?
But how will they feel if their own government engineers a rise
in the Yuan exchange rate against the U.S. Dollar? The U.S. says
that it should rise 40% to level the playing fields. A straight
translation of such a rise will mean a fall in the Yuan price of gold of:
Yuan
6.7597 x Gold price $1,250 = Yuan 8,449.63
Yuan
4.0558 x Gold Price $1,250 = Yuan 5,069.75
That is a huge drop in the value of their savings.
Big enough for even the most tranquil of investors to have a major sense of
humor failure.
A rise of 5% would leave you a bit out of joint but would be
bearable, particularly if the gold price was rising at the time.
Will the Yuan rise against the U.S. Dollar?
Since 2005 we have talked of the Yuan coming to international
markets and it is in the process of occurring as we write. There
are currently several big bank road shows touring the world advocating the
use of the Yuan in international trade.
Think for a moment of the pressure out there to acquire and
invest in the Yuan. It is enormous. In
the belief that the Yuan will rise to readjust and then remain strong,
importers and exporters would favor holding the Yuan as long as
possible. We believe that the receptivity will be
excellent. But will that make the exchange rate rise?
The Chinese know that and want that demand, but they don’t want the
Yuan to rise and spoil their global trade.
Imagine if all non-U.S. importers and exporters had to pay or
receive a Yuan price. Life would be simpler for all countries
except the U.S. No more buying the mobile Dollar. At
last a currency that is linked to a strong and growing economy.
One would expect the volatility of a free-floating Yuan to be
low. It will be linked to a ‘Basket of China’s main
trading partner’s currencies’, so be relatively stable, one would
expect. Its stability and the protection of global Chinese trade
is the driving force behind its internationalization. So its exchange
rate must be linked to that purpose.
For this to happen, China has to rapidly and enormously expand
the amount of Yuan in international markets. There would have to
be a flood of Yuan coming out of China. China would have to
manage the exchange rate carefully to ensure that the level was as they
wanted it. Of course it could go either way, so expect exchange
rate management and manipulation as it settles into global currency
markets.
Standing in Chinese monetary authorities shoes, flooding the
world with Yuan would ensure no exchange rate jump, with even a chance of a
fall. We therefore forecast that the Yuan will not move much from
current levels. Its arrival will not be quiet though!
What of Chinese Gold Investors?
The Chinese authorities have to consider not only the Trade
competitiveness of their exporters, which they still see as the driving force
to their growth, but they also have to ensure the preservation of the value
of their peoples savings.
We are reminded that the Chinese government is keenly aware of
the potential for social unrest in the country. Such a savage
drop in the Yuan gold price would result in a devastation of savings that
could become a festering sore. So we forecast that the Yuan
will not be allowed to rise by any significant amount. We
also forecast that the Yuan price of gold will not rise or fall more than it
does in the U.S. Dollar at present.
The counter that will prevent this, we forecast, will be
the rapid internationalization of the Yuan and in such quantities that
foreign exchanges will not be inclined to raise the Yuan exchange rate.
Of more significance to the gold price is if U.S. importers and
exporters had to buy Yuan to trade with China? In itself it seems
reasonable, but in terms of an attack on the Dollar we see fur flying
everywhere.
Julian
D. W. Phillips
Gold/Silver
Forecaster – Global Watch
GoldForecaster.com
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