When the dollar devaluation begins, gold and silver will shine
November 16, 2006
As we've repeated for the last few months, the next leg up for precious metals
will be their emergence as currency alternatives, specifically to the US dollar. The
auto makers in the US are calling for the US government to nudge the Bank of
Japan along in revaluing the Yen at a quicker pace, the European Central Bank
has made moves to continue raising the interest rate on the Euro, the Bank of
England has continued raising interest rates, with the Democrats now in control
of Congress there are concerns about protectionist policies being put in place
to affect trade deficits, and the Chinese are rapidly reaching an inflection
point on what they can do with their FOREX reserves. Sooner or later,
someone is going to make a break for the exit on having massive US dollar exposure...the
question is who and when?
Every economist around the globe is aware that the US dollar is quite sick
right now and it would be to everyone's benefit to have a slow, methodical devaluation
for deficits and debts to work themselves out over time. We don't think
that will happen. Sooner or later, someone is going to get antsy and begin
protecting their reserves through significant diversification of currencies and
precious metals, or in a doomsday scenario, just start purging dollar assets
like bonds and T-bills. Either activity will be extremely beneficially
to a rapid appreciation for precious metals prices. In the end, it's not
going to particularly matter if it's an Asian country reducing exposure or something
that is done on a global scale. Even if an orderly dollar devaluation is
able to be accomplished, the result will still be an appreciation for precious
metals. When the dollar devaluation begins, gold and silver will shine.
US$1 trillion dilemma: What to do with it?
(Xinhua)
Updated: 2006-11-15 14:23
As official data flash up staggering US$1 trillion of foreign exchange reserves,
China is debating whether the huge stockpile is a blessing or a burden and
what to do with it.
The huge reserves are a reflection of China's economic achievements since
reforms began in the 1980s, but observers worry that an excessive, fast-growing
stash will endanger currency stability and liquidity.
Since 1980, China's foreign exchange reserves have jumped from zero to US$1
trillion, with rises of more than US$200 billion in each of the last two years.
The rapid growth of reserves could fuel speculation on the appreciation of
the Chinese currency, or Renminbi (RMB), said Tan Yaling, research fellow with
the China International Economic Relation Association under the central bank.
The product of foreign trade revenue and foreign investment, China's huge
reserves are a target of international critics, who argue that the RMB should
be revalued, saying that the undervalued yuan gives Chinese products a price
advantage in international markets and hurts manufacturers from other countries.
However, some economists say the rapidly growing and reforming Chinese economy
needs a huge reserve in order to protect itself against financial risks created
by speculators and possible financial crises.
"Huge US dollar reserves can deter international speculators as well
as foreign politicians who like to make threats about economic sanctions," said
Yang Yingjie, a PhD in economics and associate professor at the Party School
of the Communist Party of China Central Committee.
Although China is estimated to need only US$600-700 billion to guard against
financial risks, a trillion is not excessive, said Yang, adding that a stable
financial environment is the key to the success of the country's reforms and
development.
It is not so much the quantity as the structure of the reserves that is of
concern, said Tan.
She said the government should consider diversifying the foreign currencies
held in reserve, but added that it will be hard to challenge the dominance
of the US dollar in the next three to five years, as the United States continues
to set the pace for the global economy.
"The United States is the largest manipulator of foreign exchange rates," said
Liu Yihui, researcher at the Institute of Finance & Banking (IFB) with the
major official think tank Chinese Academy of Social Sciences, noting that the
superpower can eschew debt and provoke reserves losses in other countries by
devaluing the dollar.
Zhou Xiaochuan, governor of China's central bank, said Friday that China
is pursuing a more diversified forex reserves portfolio, triggering a slump
of the US dollar in exchange markets.
"We are doing something about foreign exchange reserves," said
Yu Weibin, an expert with the IFB, while declining an interview request.
What should be done with the reserves?
Some experts recommend buying foreign high-tech equipment and strategic materials
like oil and farmland, supplementing pension funds or supporting public services
such as education, medical care and conservation. However, others argue
that such choices may fan inflation risks, because the central bank may have
to spend more RMB to keep exchange rates stable.
Wu Xiaoling, deputy governor
of the central bank, has stated that forex reserves cannot be consumed with
impunity, pointing out that the RMB must be used to pay for the reserves. Wu
counseled investing the reserves in state-owned banks, especially listed ones,
as previous experience showed that this would preserve and increase the value
of the reserves.
Liu argued that part of the reserves should be used to buy oil, gold,
silver and other rare metals as a hedge against dollar risks.
"The central bank has to consider monetary policy, but the reserves are
a national resource that need to be proactively managed," said Tan.
She said the government should relax restrictions on foreign exchange held
by individuals and enterprises.
Foreign experts and organizations like the International Monetary Fund have
also suggested a free floating exchange rate system and the lifting of foreign
exchange restrictions but Liu disagreed, pointing to risks of turbulence that
would require even larger forex reserves for financial security.
"In the long term, China should reduce the excessive growth of forex
reserves by adopting a different mode of economic growth, but stable exchange
rates are necessary if the market is to fully play its role in adjusting the
economic structure," said
Liu.
As the debate rages on, China's State Administration of Foreign Exchange
(SAFE) has decided to recruit 30 more staff members for its Reserves Management
Department, bringing the total number of staff to 200, according to the China
Business News. Each of them is in charge of about US$5 billion.
Having a trillion US dollars is indeed a blessing, but managing it is quite
a burden. |
