China Devaluing the Yuan – Implications

Markets are still reeling from the shock move by China to lower its currency peg to the USD by 1.9%. That might not seem like much but in the context of the biggest deviation from the USD this year being just 0.16% it very much is and the markets certainly reacted that way. Whilst China stated confidently it was a ‘one off’ few analysts appear to believe that. Why? Because China have now well and truly entered this ‘Currency War’ that has plagued the world’s central banks since the GFC – central banks trying to force down their currency through zero or near zero interest rates or rampant money printing to bolster exports. For China too, it is most appealing as it kills 2 birds so to speak. Firstly it addresses their global export competitiveness. They’ve had to endure a 15% rise in value because of being linked to a USD rising on the much anticipated Fed tightening and at a time when China’s economy is showing serious wobbles. Secondly it addresses the IMF’s main concern in not including them in the SDR last week, in that it is not yet an internationally freely traded currency. This is a big step in that direction. The danger? Well they are near equal to Japan as the biggest holder of US debt in the world. They have a large number of businesses heavily indebted in USD and have already seen some large defaults – this will just exacerbate that.

But why has gold shot up $25 since the announcement? There are likely a number of reasons. Firstly it is yet another very clear sign of a global economy in severe stress. China is, on a like for like basis, the worlds largest economy and not far behind the US in a simple GDP account. It is a clear sign they are in trouble. Secondly, they are the world’s biggest consumer of gold (1,464 tonne YTD!!) and when you know your currency is going down one of the best means of protection is gold. We’ve seen that very clearly in Australia this year where gold and silver are up 5% and 10% respectively in AUD whereas they are down 5% and 0.6% in USD terms – and that with the AUD at 73.9c today and most forecasts for high 60’s to 70 for year end!

There is a line of thought that since the IMF rejected the Yuan for the SDR the gloves may be off. This currency move could be the first, announcing their REAL gold reserves could be the next. If you want a big jump in the gold price, should they do the latter, you just watch…

 

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The sky is falling and we're all gonna die!

 

Not me. I am under the dome.

 

That's the eventuality for sure. I, for one, would like to delay it a bit.......

 

Death by Gold, ummm ummm good, sort of like Campbell's Soup.

 

Seems like there's a new reason every week why I should buy gold , for the past 30 years or more .

 

Well...what are you waiting for???

 

It's so simple, why didn't I think of that. These bullion pushers are geniuses....... Of course, I am not exactly sure how ones "KNOWS " their currency is going down, and it would probably be good to know what it is going down against..... but these are just minor details.

Of course, if I knew all that stuff, I most likely wouldn't waste my time on Gold and would make Millions on the Forex market, but that is just me....

 

And in about 10 of those 30 years it was a good idea

 

I bet they wish they had held off buying and had their USD back again, wonder if they know how much they lost! amateurs!

 

Ainslie,

China may be buying gold - but I think everyone should look at the bigger picture of who HAS the gold (and therefore is making the rules).

And your numbers for China's gold - well at 1464 Tonnes. Total gold held in 2014 was ~1054 tonnes. That says they've bought ~400 tonnes YTD - not 1464.

Now, I could be wrong but I'm seeing very different numbers than what you are preaching.

Second - they are nowhere near the largest. Not even in the top 5 (and when you're behind France, you're behind!!!)



And when you say "China is on a like for like basis - on par with the USA" are you referring to the GDP or GDP per capita? Because you're very wrong on that too. Off by a factor of almost 8 on the GDP per capita. In order to make them a "like for like" you must involve a "factor of 5" since we have 318million people and they have 1.35billion.

And if you take the two factors of GDP per capita and the population - you will see a ~40% deficit in the "like for like" theory. They are growing - and quite fast - but the numbers do not lie.

53,041.98 USD (2013)
USA, GDP per capita
Total GDP (318mil people): 17,185,356,000,000 (17.185 trillion)

6,807.43 USD (2013)
China, GDP per capita
Total GDP (1.35billion people): 9,189,450,000,000 (9.189 trillion)

So... Let me finish by saying that I'm a reasonably educated investor. Most of my wealth is accumulation - not an astronomical wage earner. I do well, but I'm smart with what I get. Your comments seem to be targeting fear, and while there is a healthy amount of it in the economy right now - your reasons for why - and particuluarly your numbers - just aren't cutting my mustard.

What I'm reading from you is..well... I'll be nice and just say it's not what I see happening in the real world - or at least not the perceptions you are pushing. What I see is a hardened point of view, and a bunch of rationalizations taken out of context to support the view.

A better way to operate is to read all of the information and then FORM your views from what you have learned.

I hope all that read this also don't take my word for it - and do their own research. I could be wrong too, and I won't tell you otherwise.

Snake Oil anyone?

 

I'll take a pint.........trying to loosen some lug nuts.......

 

"As it happens, some Chinese snake oil, made from water snakes that consume fish, is rich in a key omega-3 fatty acid, and so could have some anti-inflammatory efficacy, either taken orally or applied as a liniment—that according to an analysis reported in 1989 by Richard Kunin, a nutrition-oriented physician. More recently, at Japan’s National Food Research Institute, a team of scientists led by Nobuya Shirai fed oil from the black-banded sea krait to mice and found that it promoted swimming endurance in the mice, whereas lard or even fish oil did not. But to conclude from such tentative research that there is a health value to drinking snake wine—made from non-sea snakes to boot—is certainly a leap too far."
http://www.naturalhistorymag.com/perspectives/102171/snake-oil-redux

"William S. Haubrich, in his book Medical Meanings (1997, American College of Physicians), mentions the hypothesis that the term came from the eastern United States.[page needed] The Seneca people, indigenous to the New York and Pennsylvania region, would rub cuts and scrapes with the petroleum collected from oil seeps. European settlers observed this habit, and in mid-nineteenth century they began bottling and selling the substance as a cure-all. They named the product for the local tribe as "Seneca oil". Supposedly through mispronunciation, this became "Sen-ake-a oil" and eventually "snake oil".[2] Haubrich remarked, "This story is almost too good to be true – which means it probably isn't."[page needed] It appears to be a case of folk etymology, since no known historical evidence supports this explanation"

https://en.wikipedia.org/wiki/Snake_oil jim

 

I'm in for 1000 shares of 'snake oil'........

 

http://business.financialpost.com/b...-giveaway-that-chinas-growth-numbers-are-fake

 

That will be $32,500 ($3 per share) and shipping will be $500 for a total of $54,994.43

Sincerely,

Snake Oil Salesman

 

Brett, thanks for pulling back the curtain with that chart. I'm surprised to see that Italy has twice as much as China. And I thought India would be higher.