Leeb Capital chief outlines how bullion will catapult the yuan into an international currency
In a July 11 Fox Business interview
, Leeb Capital Management CIO Stephen Leeb boiled Ben Bernanke's Wednesday speech down to its essence: "The dollar's too strong to sustain this recovery."
Thus, the Fed will keep busy devaluing the currency to counteract its recent strength, Leeb argued.
Another currency also loomed large in Leeb's interview: China's yuan, or renminbi. Leeb explained that gold
was left off the central banks' list of top-tier reserve assets in order to prop up the dollar's status as the top world reserve currency. However, as China continues accumulating gold, and the bullion-trading market shifts from West to East, China will have the backing it needs to internationalize its currency. Exploding gold-trading activity on two top Shanghai exchanges this week bears witness to the growing trade in Asia.
Leeb noted that China doesn't think in quarterly terms but over 10-year periods. Gold investors should maintain the same time frame with their hard-asset portfolios. According to Leeb, short-term movements in gold are unimportant because over the long haul, "gold is going to be an integral part of the reserve currency system"
and therefore "one of the biggest, if not the biggest, bull market in our lifetime."U.S. economy on life support"If the dollar continues to go like this, the exports are going to dry up, and the only sectors in the economy that we have going for us are going to be autos and housing,"
Leeb told Fox. "And guess what? That won't carry it. No manufacturing jobs (were) created (in the) last payroll report. That can't stand. The IMF lowered -- lowered -- their estimate of U.S. growth. And this is what Ben Bernanke is paying attention to."BIS ignores gold as liquidity buffer"Gold is much more than the story of about $300, $400, $500 on it,"
Leeb said. "Gold is going to be an integral part of the reserve currency system three, four, and five years down the road, and I think the West, the West is desperate to keep that from happening. ... If you go back to January, the Bank for International Settlements -- the central bank of central banks -- had to say what should be liquidity buffers in case 2008 repeats itself. Triple B+ bonds are fine. Some equities are fine. But no gold. Now why no gold when gold acts better than any other asset during 2008? The reason is they don't want to give anybody the idea that gold can be a currency, because if gold becomes marked as a currency, goodbye, dollar, goodbye, euro, goodbye, everything. ... Except hello, yuan, hello, yuan.""A massive flow of gold from West to East""And that really is the story now. How fast can China get its act together because there's no doubt they'll have a partially backed currency,"
he predicted. "Gold will be partially backing the yuan. ... There is a massive flow of gold from West to East -- massive. And we are doing our best to kind of keep it down. And you know what the Chinese are saying? 'Thank you. Thank you. Thank you for letting us buy it at $1,200, $1,300, $1,500, $1,800. Because if we had to, we'd pay up to $2,500 for it.' They see the writing."China thinks ahead "in 10-year intervals""The Chinese don't see things in quarterly intervals,"
Leeb said. "They think in 10-year intervals. And that's why you get all this idiocy about how much overinvesting they're doing. If they think coal is going to peak at 2025, you don't start building out infrastructure in 2024 -- you start building it out now. And that's what they're doing. That's what they're doing with the yuan and that's what they're doing with gold. Right now Switzerland, Germany, and London -- all major competitors as to who will be the hub in yuan trading. And they get it. ... [Gold] may be up and down, but if it gets to $1,500, it's OK to buy. You're buying into what I think is going to be one of the biggest, if not the biggest, bull market in our lifetime." Field reports show frenzied China trade
The latest reports from China support Leeb's arguments. "Shanghai gold premiums were at high levels this week as supplies into the world's second-biggest gold consumer dwindled and are set to remain tight over the next few months," Reuters reported
. "The current gold supply is getting increasingly constrained while the demand remains strong,"
said Albert Cheng, managing director for the Far East region of the World Gold Council.
Meanwhile, a new option in metals investing is off to a racing start in Shanghai. "Trading volumes for gold and silver on the Shanghai Futures Exchange (ShFE) have jumped to record highs a week after the bourse launched after-hours trading, driven by a surge in investment and hedging demand," Reuters noted
."The ShFE, China's biggest commodity exchange by contract value, launched night trading on July 5 to give investors a tool to manage risk during trading hours in London and New York,"
the report said. "The extended hours could give China a better hold in the global gold market and offer a taste of what lies ahead for contracts such as base metals, if the exchange sticks to plans to extend trading hours for other products." "The silver and gold contracts have been going gangbusters"
A long-term game changer for gold could occur if the price-setting controls shift from West (London especially) to East. "The pricing power for main commodities is still decided by trading in overseas market, and any large price movement will not be favourable for domestic investors to control risks,"
said Sun Yonggang, an analyst with Everbright Futures in Shanghai. "The night gold trade will help investors to adjust their positions immediately facing overseas market volatilities and the liquidity for gold night trade looks promising." "The silver and gold contracts have been going gangbusters. You could reflect on ... what that could mean for their base metals contracts, assuming they plan to start the night sessions,"
exchange chairman Yang Maijun said.
Some are worried about a Chinese hard landing, but one top official is unconcerned, at least publicly. "Chinese Finance Minister Lou Jiwei signaled the world's second-biggest economy may expand less than the government's target this year and that growth as low as 6.5 percent may be tolerable in the future," Bloomberg reported
.Hard landing won't hurt gold
Gold even could do well in a more serious slowdown, CNBC reported
: "Chinese demand for gold will likely benefit from a steep fall in the country's economic growth, which could trigger a structural change in why people buy the precious metal as well as increase its safe haven appeal, Barclays Research said in a note on Wednesday.
"'A hard landing could shake faith in the government and lead to a big fall in yuan-denominated assets, which could mean gold becomes important for domestic investors to hedge what they may view as a greater set of risks than previously,' Sudakshina Unnikrishnan, commodities analyst at Barclays said.
"A significant slowdown in China could be the trigger for a change in the pattern of gold purchases as well, according to Unnikrishnan. This could lead the Chinese to move away from buying the precious metal largely during festivals, when inflationary pressures are high, or when there is a big fall in international prices, to adding gold more consistently to their portfolios."India's fund managers still bullish on gold
China is the world's No. 2 consumer of gold and is in a neck-and-neck race with India to be top dog. Recent government restrictions on the gold trade there, aimed at reducing India's account deficit, have some questioning whether gold demand will rebound in the fall, during its traditional wedding and festival seasons. According to Reuters
, some experts are keeping the faith in gold: "Fund managers in India continue to prefer domestic debt and gold, expecting markets to recover from their recent sell-offs and to prove sturdier investments than stocks."
China and India remain the largest consumers of gold in the world, and that's not going to change. With Singapore vying to become a major gold-trade hub, Asian demand will grow even more over time. So whatever happens in the short-term price fluctuations on the "paper gold" markets of the West, maintain a long-term horizon -- like the Chinese and their "10-year intervals." Physical gold ownership is not about short-term trading but long-term holding, and that's what wins the race.