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Sure, I’ve heard this rumor several times in the past few years and nothing substantial has come of it. Will anything be different this time around?
One thing that could increase China’s willingness to diversify away from U.S. dollars and debt is the $5 trillion bailout tab that Washington has racked up in the last year. You are reading correct. The number is $5 trillion, not $700 billion. All of these bailouts will be funded by issuing new debt or printing new money and have already pushed the budget deficit to an all-time high of $237.2 billion in October. No matter your view on the markets, this scenario is hyper-inflationary once it plays out.
Thus far, the dollar has rallied in the face of these bailouts, but once the money hits the system there is nowhere for the dollar to go but down and this spells explosive new highs for precious metals and other commodities. I don’t assume to know how soon this will manifest, but it is worthwhile to have a core holding of precious metals and then add to your positions once the move begins. The upside potential is far greater than the downside risk at current prices.
Gold Rush by Benjamin Scent appeared in The Standard on Friday, November 14, 2008. Bloomberg published a similar piece the same day. Got gold?
The mainland is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold, a person familiar with the situation told The Standard.
Beijing is considering changing its asset allocations during the financial tsunami in order to build up gold reserves “in a big way,” the source said.
China has the world’s biggest foreign-exchange reserves at $1.9 trillion, according to data compiled by Bloomberg. It is also the largest overseas holder of Treasuries after Japan. China’s demand for gold jumped 23 percent in 2007, making it the world’s second-largest consumer.
The Asian nation may buy more gold for its reserves on concern the $700 billion U.S. bank bailout will cause declines in the dollar and Treasuries, the Standard newspaper in Hong Kong reported today, citing an unidentified person.
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I also expect China to start to slowly diversify away. I sort of believe that China and Russia want to become the power brokers on this planet - and that by causing a collapse in the USD, they could perhaps make it happen - but that they don’t need to play this card for a few more decades - and the US is doing a good job of hurting itself!
On the other hand - China needs the US to keep investing in it and building itself up. China will continue to buy USD at a steady rate - the problem is that the USD is being created much faster now than in the past. China may buy the same amount of USD, but may store any extra wealth in other currencies. It’s not in China’s best interest, at the moment, to hurt the US. But the USD may go down anyways because they are printing it faster than China would ever be able to, or want to, buy them.
So, the problem with the USD is that it is being printed too fast.
It only makes sense to continue purchasing US debt if the advantages to its export trade exceed the declining purchasing power of the US dollar. Right now the balance is beginning to shift in a big way as the US consumer drastically cuts back on spending and the US gov racks up huge mountains of debt to bail out everybody in sight. This spells trouble for their treasury and bond markets and hence the value of the US dollar.
China is not the only one that has subsidized the US debt markets. Ninety percent of the world - Europe, Japan, Russia, Korea, Saudi Arabia and the rest of OPEC have purchase massive quantities of US debt in the past as well. All these countries are in trouble now with their falling trade and exports to the US. Where will the money come from now to purchase this tidal wave of new US debt sure to hit the markets soon? Answer- the only place possible. The Fed monetizes it - ie creates it out of thin air!
I don’t think the rest of the world is that blind and stupid to not see the handwriting on the wall. IMHO we are going to see a massive devaluation of the US dollar coming and very soon.
The following is from my November 12th post on NicholsOnGold.com:
The United States Treasury and the Federal Reserve are throwing a trillion dollars, more or less, into the banking system. And, there’s surely much more to come.
It’s not only the U.S. monetary authorities pumping up the money supply. Their counterparts in every major economy - including the United Kingdom and the Euro zone, China, Russia, Japan and on and on - are doing likewise.
We have never - in the history of money - seen such an expansion in its supply without, after a period of time, a rapid deterioration in its value, in other words, without a rapid increase in the overall price level. More than any other factor influencing the gold market, it is the inevitable rise in price inflation that will propel gold skyward in the next few years.