Monday, 17 October 2011

Yuan closer to reserve currency status

Even though the Chinese currency, the Yuan (or Renminbi), is still pegged to the current reserve currency, the Chinese officials are taking more and more steps towards consolidating the global role of Yuan. One of them is the long term purchase of gold, as the saying goes, with every dip, there is Chinese gold buying. The second step is to start offering gold in Yuan. The next step can only be denominating the yuan in gold and restricting yuan purchases.

According to a recent article on the financial blog ZeroHedge the Hong Kong Stock Market started to offer gold contracts quoted directly in the Chinese currency. This may facilitate trading for the locals, but may also be part of a greater scheme.

This move shows the desire of the Chinese officials to push the yuan into reserve currency status. With the more and more countries accepting trade settlements in yuan (Russia, South Africa) and with the Governor of People's Bank of China declaring that:
"Foreign exchange reserves have exceeded our country's rational demand, and too much accumulation has caused excessive liquidity in our markets, adding to the pressure of the central bank's sterilization",
the plan becomes more and more clear. What does this mean for me and why should I care ?, you may ask. Well, for a starters, understand that the days of the dollar as a reserve currency are comming to an end, and with them the possibility of unlimited dollar printing.

If the dollar will cese to be the global reserve and settlement currency, the US will have to go through the same purgatory as the one the EU is going, and, as a comparison, the troubles of the US will far surpass the EU's.

As for the precious metal prices, this can't be a better news, as it indicates further weakening in the dollar (with the accompaniing inflation), it indicates further strenght in the Chinese commodity demand and lastly, it may indicate the PBOC (People's Bank of China) is considering pegging the Renminbi to gold, or more probably to a basket of assets (be them commodities or currencies).

In the mean time, gold is showing some weakness as result of the European Union debt concerns, but it may well be temporary in nature. There will be a new leg in the gold and silver upward trend, and if the long term support level will still hold (200d EMA), it may well be sooner than you think. Speculative owning of gold and silver is down to the lowest in months, while hedge funds increase exposure on gold and silver.

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