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

Long term you are right to an extent, and you are right external components in my example would not change. But I think my point is more than even simple wages. The loans to buy the equipment now would be in stronger currency, meaning the factory needs more profits denominated in dollars to pay them back. Most things would not change like energy. Just because the Yuan strengthened doesn't mean Chinese coal mines now magically will take fewer Yuans for their coal. So effectively short and medium term energy also is more expensive.

Its a moving target, and I agree the consumers benefit in that situation, I was simply trying to illustrate why currency exchanges are closely watched and acted upon by nations, especially exporting based ones. The politicians can lie to us all they want, but the USD has intentionally been lowered in value versus other currencies in the last 15 years to try to spur exports.

 

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This also puts downside pressure on the price and if everybody who bought gold and silver was doing this the price would never rise, and they wouldn't be worth investing in from a dollar standpoint. Still nice to have real money in hand though.

 

It'll never happen, period. Little Guys needn't worry about this.

My clients -- who had socked away HUGE gains on Faber's 3/6/09 call, buying bullion with proceeds -- were very very happy to reduce/mitigate 'nominal PM losses' in subsequent volatility by trading the inverse ETNs. Of course, no REAL losses incurred, since the bullion is still held - but the OPTION TO HEDGE is a deal-maker for some investors. And YES they picked up abit of alpha there (Paper gains) but no, not on every trade. Prudence & patience there, to be sure.

To hedge or not to hedge? As Fed Hickey pointed out in last week's Barron's : http://online.barrons.com/article/SB50001424052748704843204578245523623098286.html
>>Hickey: It has been great for 12 years, but it doesn't always go up. In the last great gold bull market, gold rose from $100 an ounce in 1970 to $800 in 1980. But it fell 46% in 1975-76. Anyone who left the market then missed the best part of the rally -- a subsequent rise of 600%. In the latest 12-year period, there have been five corrections in the gold price, ranging between 15% and 30%. The latest correction was 19%, and gold has bounced off its recent lows already.<<

There WILL be more -20% declines, predictably. Why sweat those anyway? Paper is for investing... so use it that way lol The cost basis at Fido is like $9. a trade, a pittance, if you've already got a retail brokerage acct. It ain't rocket-science!

 

But even going long on paper is diverting demand from the physical metal and putting downard pressure on the price. So paper long pushes price up less so than if it were physical long due to demand not being on the physical, and paper short pushes the price down because it's short.

People should know they are hurting their own investments by using either of these methods, even if it's just a drop in the ocean on the grand scheme.

 

That's hopelessly fanboy, sorry. Hedging (anything) doesn't "hurt" investments per se: it's just a market-neutral strategy. Investments are inanimate, anyway.
Being hedged means not having to rush for the exits. My clients found it 'good on Paper' too.

There are other ways (perhaps more profitable and complex, for the vast majority of stackers here) to hedge a large stash. It might be worth someone's time/money to read up on the benefits, thinking more broadly, for a start: http://seekingalpha.com/article/584081-hedging-against-gold-losing-its-haven-status

Back on topic, have we discussed the Customs Gold Units yet? I bet many here were alive when those circulated ("in our lifetime"). Bullion was superior I'd wager lol

 

Forgive me if I am putting words in your mouth, but my interpretation of what you are saying is buying an ETF that has a sell effect in the market doesn't put downward pressure on the price. If that is what you are saying, that's just BS.

If you are saying it's not enough sell side pressure to make a difference, then I can follow you half way there. It's a matter of volume.

 

You're not putting words in my mouth... you're quoting me out of context, though.
My comment only neglected that personal possessive qualifier {"THEIR"} because that's clearly what I meant. Silly quibble.
Paulson and whoever manages Barrick book is not this audience either lol

 

I really can't think like a typical "investor". I just don't trust that any of this stuff will be there. I like silver because there is no counterparty risk. If I sell it, or trade it, the person who gets it knows it's worth something. I also like cast iron pans and firewood, but they are bulky.

The way I see it there is money to spend, and I do, and there is money for saving, which I always plunk into silver or a hard asset lately. I consider it the same thing to spend six bucks on a bag of kindling or on a pre-64 US quarter. I am going to use them both at some point in the future. Cash money, I'm not so sure of.

I think this is going to be a problem, because there are going to be a lot of people thinking like me. They will lose faith in the nonsense money, and they aren't going to play the game that spins the world economy. Maybe China can get us back into the game by backing their currency with gold, but I don't think I'll trust that either. Sorry.

 

And the govt is so much more well loved and trusted today than in 1933, probably everyone would gladly turn over all those ASEs for free if they ask for them back.... or NOT.

They can come up with any ban/confiscation they want. Maybe you'd turn them in. Whatever I had would become lost before I'd turn over a single junk dime.

 

I don't think many people have any silver or gold at all, and those who do are dying to turn it into cash. Look at all these gold buyers going around. The Chinese know the value of precious metals. I don't think they are going to back their currency with it, however. I think the government may try to turn a bunch of T-bills into hard assets though. Maybe they will use the pretext of backing their currency with it.

 

I had another thought about this. What you are saying is true of a deflating and thus strengthening (buying power-wise) currency. But a gold standard doesn't deflate, it fixes the buying power in place. So it wouldn't hurt exports. It would only inhibit the ability to make exports cheaper. The strength from a gold standard isn't in buying power, but rather in confidence that buying power will not be lost. If more people choose to use that currency it still won't impact the buying power.

 

I disagree completely. The premise was if the Yuan became gold backed. You said it would become the most valued currency. My entire post was about WHY the Yuan strengthening versus all other currencies would lose jobs in China. If the Yuan strengthens versus all other currencies, the cost of buying Yuan denominated products go up, probably to be higher than buying from countries NOT denominated in Yuan.

Why do you think countries like Japan are intentionally trying to deflate their currencies? It is always net exporting nations that try to weaken their currencies on purpose.

Your post just now is applicable if all currencies become pegged to gold at rates equal to todays conversion rates.

 

I didn't say most valuable. I will quote what I said, but the jist of it is that it would be the most sought after. A gold standard doesn't change the value, only the desirability because there is no longer any concern about loss of buying power when the buying power is fixed. The value would be whatever it was when the gold peg was implemented.

So yes your post is perfectly applicable if the yuan is strengthening, but a gold standard doesn't strengthen or weaken the currency. What it will do is cause other non-gold backed currencies to flood the markets because nobody will want to use them. If more people want to use the yuan then if anything it would drive up the price of gold which is backing the currency, and thus the price of all other assets, and so the yuan would remain unchanged in buying power but the other fiat currencies would grow weaker.

I suppose that if all other currencies are weakening then relatively speaking that would be the same as the yuan strengthening. So maybe I am splitting hairs. The caveat is that as soon as one nation goes to a gold standard anybody else who doesn't want a weakening currency will probably peg to that currency unless they have some of their own gold around and want to play with the big boys. I wouldn't expect Japan to, and I wouldn't expect the US to except that we would need to so they don't swipe world reserve currency status from us. In addition to whether a nation wants to or not, a gold standard could very well be a necessity just to be a player at the table in the future when this currency war is over.

Something else to consider is that China may be perfectly happy to allow our markets to drive the global price since they are in a buying mood. If and when they deploy a gold backed currency they may decide to take the reigns on price control after it is no longer in their interests for it to be at a bargain price.

 

The use of the term gold-backed currency indicates a willingness of the government to issue gold at the rate indicated when presented with their paper. No limits on amounts or what country is exchanging it. To be a world reserve currency the US has done this during the time it was metal backed. A chance was given to holders of the paper to exchange it or the bill would be no longer acceptable for exchange.

I am sorry, but China does not have the trustworthiness among the majority of world countries to make them believe, IMO. Yes, Brazil , Russia , and a few others indicated they were , but that was the governments working a forex advantage which is not as strong now. Switzerland probably could do it , except their float is too small. Germany, GB, Russia ? I think not IMO.

I assume that you would seek to exchange USD for Yuan if it was labeled as metal backed, but I wouldn't due to the risk factors.

Jim

 

I am simply postulating what the outcome of a gold backed yuan might be like since they are openly buying gold with that intent since that is the only way I am aware of that they can become the world reserve currency and no longer be at the mercy of US dollar policy to buy the oil they need. Personally I would not trade in my metal for any currency, gold backed or otherwise, except with a particular immediate purchase in mind. For any gold backed currency to be successful it is absolutely necessary that the gold can be called upon at any time, and I have no reason to trust China either, but that doesn't mean their trade partners wouldn't get on the bandwagon.