Gold Backed China’s Yuan Set To Become Global Reserve Currency?

By: GoldCore

Today’s AM fix was USD 1,312.00, EUR 994.92 and GBP 857.63 per ounce.
Yesterday’s AM fix was USD 1,340.00, EUR 1,012.31 and GBP 872.40 per ounce.

Gold fell $22.50 or 1.68% yesterday and closed at $1,319.90/oz.

Silver slid $0.30 or 1.47% and closed at $20.16.

Gold is trading down after falling nearly 2% yesterday after challenging resistance at $1,350/oz.

Gold in USD, 1 Year - (GoldCore)

Resistance is at $1,350/oz and $1,400/oz and the first level of support is at $1,300/oz which may be tested today. Below that support is at $1,200/oz and the recent multi year low on June 28 at $1,180/oz.

Some positive economic data from the U.S. and the EU was cited as a reason for the move lower but the data was mixed and all the data is suggesting that major economies are very vulnerable to recessions which will support gold.

Goldman Sachs is leaving its estimate of $1,413/oz for gold this year unchanged as they do not see sharp reductions in the U.S. Fed's stimulus program.

Newcrest Mining, the world's number three producer, is forecasting no changes in its gold output from last year but said it has to cut operating costs.

Major gold miner Agnico Eagle Mines Ltd reported a net loss on Wednesday, hurt in part by a maintenance shutdown, and said it was "reviewing all aspects" of its business in light of the recent drop in gold prices.

The gold industry and people in India are braced for a fall in supply and higher premiums ahead of festivals. The Indian Central Bank's steps to restrict imports are expected to cut supplies for domestic consumption which is leading to huge black market activity and importation.

There have been numerous reports in recent days of Indians being arrested in airports carrying gold coins and bars.

Recent media reports in China and Russia suggest that China is continuing to consider backing the yuan with gold. Since 2005, we have said that such a move by China was likely as China seeks to become a superpower and lessen and undermine U.S political dominance. We have in the past discussed the possibility of the Chinese pegging their currency to gold bullion.

World Currency Ranker - G10 Currencies and Gold (10 Years)

This decision, if taken, may lead to huge volatility in foreign exchange markets, a depreciating dollar and ultimately an international monetary crisis.

John Butler in his book ‘Golden Revolution’ and Jim Rickards in his book ‘Currency Wars’ have warned that China and or Russia could move to back their currencies with gold which would then lead to the U.S. and EU having to follow suit in order to prevent currency crises thereby leading to a new gold standard.

According to media reports, the People's Bank of China is considering phasing out the dollar as the reference currency or peg for the yuan, and to start using gold as the reference point.

The reports have not been confirmed officially, but there has been official comments to that effect in recent years and Chinese academics have advocated backing the renminbi or yuan with gold.

Beijing's possible move to back the yuan with gold would be a strategic move in order to, lessen the risk of inflation, increase the yuan’s attractiveness as an investment medium and create faith in the yuan as a reserve currency.

Cross Currency Table - (Bloomberg)

Besides being an important financial and geopolitical move it would also be a symbolic act intended to show the U.S. and the world that they are capable of taking the risks associated with a departure from the dollar standard.

It would be a strategic gamble and while it would cause much short term economic pain for China and indeed the world - it could lead to long term benefits. The Chinese tend to think long term rather than quarter to quarter.

The move could in time lead to more stable long term economic growth rather than the boom and bust cycles of recent years.

The Chinese authorities have been pushing for a more international role for their currency and as an alternate reserve currency to the embattled dollar and euro. Indeed the Bundesbank recently admitted that the yuan was becoming a global reserve currency.

With gold now traded in yuan, it appears to be only a matter of time before oil is traded in yuan thereby positioning the yuan as ‘petro yuan’ and a rival to the petrodollar as the global reserve currency.

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This update can be found on the GoldCore blog here.

Yours sincerely,
Mark O'Byrne
Exective Director

WINNERS MoneyMate and Investor Magazine Financial Analysts 2006

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