 China
Gives Green Light to Gold
Todd Stein & Steven McIntyre
The Texas Hedge Report
July 22, 2005
Snippet Courtesy of www.texashedge.com
The news that China cut its
currency link to the U.S. Dollar came and went with little media
reaction. Headlines and live feeds out of London dominated the
news Thursday, even after it was discovered that, fortunately,
the subway and bus blasts didn't cause a single injury. The rest
of the day's mainstream news focused on Iraq, Arnold Schwarzenegger,
the Supreme Court and Sudanese diplomacy. You would at least
figure that CNN.com would mention the China news as its number
one business headline but, alas, what do we see? "Google
Profit Soars; Shares Plummet"
While most Americans would
rather learn about the latest plot on Desperate Housewives
or the Tour de France (we have nothing against either), you can
bet that U.S. Government officials were paying attention when
the world's most populous country announced that they were not
going to prop up the Dollar anymore. While some politicians would
like you to believe that a Yuan revaluation is good news for
the economy, the bankers and bureaucrats at the Fed and Treasury
know better. They know what happens to the demand for Dollar-denominated
assets when the largest buyer says its appetite is waning. Treasuries
and stocks took it on the chin Thursday, while foreign currencies
and precious metals spiked.
So what does this mean for
the future?
1) Thursday's Yuan
move was miniscule. There is no way the Chinese are even close
to done - they said so themselves. Prepare for quite a few more
days like this.
2) Protectionist
Senator Chares Schumer (D-NY) is not satisfied. He called today's
news a "good first step, albeit a baby step." Schumer
has sponsored legislation that would impose devastating tariffs
on Chinese imports unless it revalues the Yuan by a meaningful
amount, probably around 40%. So if the Chinese don't get a move
on it, Schumer and his supporters will likely make their move
before the 2006 election.
3) Another hidden
story Thursday was that Malaysia also announced it was dropping
its own policy tying its currency, the Ringgit, to the U.S. Dollar
and would adopt a currency basket arrangement similar to China's.
If other Asian nations follow suit, we could see a vicious cycle
of Dollar dumping develop. We know the Asians are itching to
get out of the Dollar, but politics prevent them from doing so
- at least so far. Earlier this year, South Korea announced its
desire to diversify some of its reserves out of dollars, only
to take back its comments later that day after causing a wave
of greenback selling. Keep your eyes on comments from Asian central
banks, especially the Bank of Korea and the Hong Kong Monetary
Authority.
The bottom line is that today's
move, while small and barely noticed, coincides with the beginning
of phase two of the gold bull market. Phase one was all about
gold's inverse correlation with the Dollar. Phase two began earlier
this summer when gold broke off its like to the Euro price and
started to rise in every currency. The adult citizens of China,
all one billion of them, have recently been given the freedom
to own gold. Now the government is actually encouraging them
to purchase gold as a form of savings. As the Yuan strengthens
against the Dollar and other currencies, gold becomes cheaper
for the Chinese to buy. We have long known that the day of revaluation
was coming, now that it is here, the light says "green"
for gold.
more follows for subscribers
. . .
July 22, 2005
Todd Stein & Steven McIntyre
Archives
Texas Hedge Report
Todd Stein
& Steven McIntyre
email: admin@texashedge.com
For more information, go to http://www.texashedge.com.
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