Chinese set to back the Yuan with gold... new world reserve currency?

With rough math...
US gold reserves = 8,133 tons or roughly 261,476,000 ounces of gold... this is what currently backs our currency or rather the $16.4 Trillion dollar deficit, meaning that for every ounce of gold we have, we owe roughly $63,000 of debt... Except our currency is not backed by gold, but rather IOUs and debts...

 

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I don't see any fiat currency going back to the gold standard. Why would they do it? Look at GLD or SLV. Do you think they have an ounce for every share stored some place? No way. There is no way anyone is going to believe that the fiat dollar is backed by anything. Remember Continental Currency? It said on it that it was good to be traded for Spanish Milled Dollars. How many people do you think got their Continentals turned into anything real? Very few. This is why Nixon shut down the gold window and took us into a purely fiat currency. Who do you think is going to actually hand over the real stuff for a paper bill?

 

It's happened at my house. I think a solar panel is as good as silver. I like the fact that it has an ounce of silver in it.

 

Hmmmmmmm... so then why is this Wiki link more reliable than the ones I've used in the past?

http://www.cointalk.com/t219325-3/#post1604989

 

A fractionally backed gold standard would not work. The price of gold would rise accordingly due to the weaker nature of a fractionally based currency because it wouldn't be worth the amount of gold backing it. It has to be total number of dollars divided by total oz of gold to get the amount of dollars an ounce of gold should cost. If you say cut that in half then the dollar is overvalued by a magnitude of 2, and if everybody could buy gold for half as many dollars the market would move the price up to mesh things up.

 

If this were done in the US it would be out of necessity as a last ditch effort to restore faith in currency. However if China does it they would be doing it to take over as the world reserve currency, and if any nation goes back to a gold standard the rest will be forced to follow suit or else nobody will want their devaluing currency. Right now we are in a race to debase so there is no clear winner. Although I would argue the Russian ruble is in the best position with positive real interest rates. My take on the gold window closing was that we ran up our national debt in the Viet Nam war, essentially abandoning the gold standard long before 1971 which is when we officially declared gold was no longer redeemable. That was a reaction to nations asking for their gold back after we had already begun printing more dollars than we had gold to back them up.

 

Because yours were ones of definitions, not something as simple as who someone is. From the "World gold council's" website:

"Based in the UK, with operations in India, the Far East, Europe and the US, the World Gold Council is an association whose 23 members comprise the world’s leading gold mining companies, representing approximately 60% of global corporate gold production."

Doesn't change my response in the least.

 

I wasn't disputing your response, just thought it was ironic Yours is also one of definitions however, definition of an entity as opposed to definition of a phrase. Certainly an entity is easier to agree upon since it is tangible.

 

I don't think so. China is not such a well blessed nation that it doesn't need to trade with other countries. It has to, not for units of currency, but for food, energy. pollution abatement. So if they wish to buy scrap steel from the US, they won't ? They will, and the US company will quickly demand the gold backing their currency, and then they will have to revise the backing %. There is a greater chance that the world will give up cell phones and the internet rather than a country going to the gold backed. IMO.

 

I suppose it's hard to say since it's just speculating at this point, but my line of thinking is that if any nation goes back to a gold standard they will immediately have the most sought after currency so any other currency that continues down the road of debasement would be undesirable where as today those currencies are still desirable because they are all playing the same game. I don't buy the argument that a stronger currency hurts exports. 10 dollars or 100 pesos, what's the difference? They both represent the same buying power. The only reason someone wouldn't want another nation's currency is if it was anticipated to grow weaker after being acquired.

As for the fractional nature, I previously outlined why that is not feasible. A gold standard means actually having the gold to back up your currency, and so asking for the gold would not be an issue. It's just total currency divided by ounces of gold. Anything less is not a gold standard, it's a pseudo gold standard with an element of fiat. On a real gold standard there is no concern for someone exchanging their currency for the gold because it is backed properly. You give them the gold, they give you your currency back which you then have to destroy to maintain the ratio, or else buy more gold on the open market with it. The only need for revising the ratio would occur if money was printed without adding gold, or if money was destroyed without selling gold, but a gold standard can't work if those practices are allowed which is what we saw happen before in the US.

 

As long as gold is valued and traded in US Dollars any country that adopts a gold standard is basically pegging their currency to the US Dollar with a hitch. Being that the country's currency exchange ratio would be fixed in gold and monetary policy constrained by their gold reserves makes their economy and the value of their money very vunerable to market swings and flatout manipulation.

 

Anyone with a modicum of knowledge know that the Chinese are NOT going to peg the yuan to gold or the dollar. Their currency is undervalued vs. most other world currencies and they like it that way. Sure the US government makes an occasional little wave about removing the currency controls and letting the yuan float - because it will increase in value making Chinese exports more expensive - but the Chinese hold all the cards - they have budget and trade surpluses, they hold a lot of US Treasury debt etc.

They may well be communists, but they can out capitalist the best minds in Washington or New York.

 

"I don't buy the argument that a stronger currency hurts exports. 10 dollars or 100 pesos, what's the difference? They both represent the same buying power. The only reason someone wouldn't want another nation's currency is if it was anticipated to grow weaker after being acquired."


Read more: http://www.cointalk.com/t221322-2/#ixzz2Iu5RnUbs

Come on man, you really don't see how currency strength affects exports? Let's see, Korea, Japan, and China all make the same iphone part. The cost from each Korea and Japan is about $2 a unit, from China its about $1.75 a unit. The Yuan strengthens due to it being "gold backed", and the cost of that part goes up to $2.50 in USD. China just lost 1000 jobs, since Apple will now buy that part from Korea or Japan. Multiply that over thousands of industries and TODAY if the Yuan increased 30% against the USD China will lose millions of jobs.

THAT is how currency affects imports/exports, and WHY currency values versus other currencies are hugely important. NO net exporting nation on earth wants their currency to appreciate, lest they have to deal with massive unemployment.

 

I don't think any fiat currency is going to be too much stronger than another. What are they really backed with? Cheese Whiz, and the ability to tax their citizens.

Here's a great article from Zero Hedge about what's wrong with the world economy and how to fix it:
http://www.zerohedge.com/news/2013-...l-economic-disease-8-points-and-cure-4-points

 

Cleaned that up well, I would be thinking more along the lines of bull dung.

 

You do know you "quoted" me from the section I copied from Inflexion's response, right?

 

Gold is valued and traded in every currency differently, not just USD. A gold standard is a peg to gold, not the US dollar which is not backed by gold. The USD stopped being homogenous with gold price in 1971. I do agree it would make them more vulnerable to market manipulation since the price of gold would impact their currency's buying power, but it is not the gold standard that would cause the problem, it would be the speculators and the lack of a fair mechanism for price discovery.

 

...and it couldn't be a lackluster wedding season in India, or Turkey imposing import limits, or a strike at a major gold mine, or a new ore or ore processing discovery, or any of those things right? It would ONLY be "speculators and lack of fair price mechanism" that could affect a commodity's relative value, right?

 

The value of a good doesn't change just because a currency gets weaker or stronger. It is the same amount of buying power out of pocket regardless. If the yuan strengthens then it can buy more goods for less cost. It can also buy more US dollars for less cost. The cost to create the part would go down with a stronger currency because the materials and energy cost less as the currency can also buy more of those.

Where I will agree with you is with wages though. The wages are not going to go down just because the currency gets stronger, so that is where the cost of the item will not go down to account for the stronger currency. So ideally those wages would have to drop accordingly or people would need to be laid off which is where I think you were going. A loss in wages wouldn't really hurt anything since the buying power increased, but the loss in jobs is another story, and that will depend entirely on the employer. Thank you for helping me come to a better conclusion.

 

I don't agree with anyone here. Happily! :smile And -- if anything here is preaching to the choir -- don't take my opinion as gospel either.

Doubt I'm the only one here who has lived and worked (or travelled at length) in 'two-currency' countries. It works. Seeing that firsthand, I know that a 'gold-based fractional reserve currency' is not only possible, it's historical fact. Many, many times over! And because it's existed before, it may again.

That is not to say the Chinese are planning to 'back the Yuan' (they somehow may, or not) nor that it's inevitable some country will. But it remains a distinct possibility Gold WILL re-emerge in a more explicit monetary form - say, a component/reserve in a future supra-currency.


Nevermind several thousand years of historical specie. Long-recognized as a currency, Gold is confirmed today as a transactional reserve asset by the ISO and World Bank; see ISO 4217. Any nabob's idiotic denial of that functional reality is irrelevant but telling - there's waaaay too much Paper-Bug blather (misinformation, lies, lunacy) on this site and elsewhere online. The trend favoring Gold as a monetary alternative is also well-established, already. So tune out the Paper-Bug liars, Gold deniers, 'Dollar Forever!' fantasists and the ersatz Money-brainwashed... most of their 'thinking' is make-believe, flawed straight-to-garbage. (And pity the fooled, only.)

Here are a few defunct Paper currencies - unlike Gold, Remember any of these, in your lifetime?
http://en.wikipedia.org/wiki/ISO_4217#Historical_currency_codes

It's also important to recognize that EVEN IF a (hypothetical) Gold-transitional event event occurs in the near future, there's also no guarantee any little CTers here would realize any direct benefits either. On the balance though, individuals can & should try to protect themselves from the local evils of Paper Fiat (Proof: several hundred failed Paper Currency Failures before ours.) It's easy enough to hold a portion of your wealth in Gold and other PMs and History shows that's generally a wise move.

Various boogeyman scenarios jawboned here (Risk: "investment" schemes, robbery/confiscation, fake PMs, one period of manipulation, etc.) do not outweigh the numerous and increasingly obvious perils of Fiat Paper. But prudence holding PM bullion is mandatory anyway, and (I think) PMs remain a "poor investment" only because they're not really for that purpose (e.g. alpha, cap apprec, income, etc.) just a reserve or 'Rainy Day Fund.'

ALSO:
If committed to holding a larger portion of your wealth in PMs ( >25%) you really ought to investigate the benefits/risks of moderately TRADING INVERSE PM ETFs in your own brokerage account. You can neutralize (some) losses on the downside with inverse PM ETFs, if you take the time to study and understand the inevitable declines in a PM Bull mkt. It's never too late to learn how (the web is awesome for that) - and you probably should ... IF you're a Gold-Bug hoarding a sizeable stash.

Here are the better known LEVERAGED INVERSE ETFs used by US investors (for other markets: see what's available.) Caveat emptor! Read the prospectus, too.

ProShares UltraShort Gold.... GLL
DB Gold Double Short ETN.... DZZ

ProShares UltraShort Silver.... ZSL

See for example: http://www.google.com/finance?q=NYSEARCA:ZSL