Recent moves to introduce the Yuan across the globe will shrink the use of the $ in global trade. With the U.S. in decline, will come a fragmentation of world monetary power.
In such a climate, gold will be attractive again, as a long-term investment, as a protection against international uncertainties and strains. Gold may also become a vital hedge against local currency volatility.
As the Yuan appreciates against the U.S.$ and other currencies as a consequence of these changes even the Chinese may find gold more attractive as part of the 'basket' of foreign currencies in their reserves and personal portfolios.
Of course, the Chinese have undervalued their currency so far which has made US goods more expensive.
So where will all these dollars go? They will have to go home to where they will add to the massive recent issues of dollars and will precipitate inflation dramatically, once the process is really underway.
Bear in mind that it is not only the Chinese who will lower the use of the $, all nations with an overexposure to the $ in their reserves may leap at the chance to reduce this percentage and introduce the Yuan to these reserves as a replacement to the $.
Actions taken already to make the Yuan global
* China has agreed a 70 billion Renminbi [Yuan] currency swap with Argentina that will allow it to receive Renminbi instead of U.S. dollars for its exports to the Latin American country.
* Beijing has signed 650 billion Renminbi ($95 billion, €72 billion) worth of deals since December with Malaysia, South Korea, Hong Kong, Belarus, Indonesia. This, and now Argentina, in an attempt to unblock trade financing that has been severely curtailed by the crisis.
* The Chinese government has permitted five major trading cities to use the Yuan in overseas trade settlement. This is a very important step towards the establishment of the Yuan as a global and reserve currency.
* Shanghai, Guangzhou [The old Canton], Shenzhen, Dongguan, and Zhuhai, are the cities that have been designated for the purpose. Concentrated in the South the Pearl River Delta cities are the spearhead of Chinese exports and already developed to the extent that even the most high tech of products is rapidly approaching international standards.
Rising Yuan?
Consistent with these moves will, eventually, come the 'floating' of the Yuan, so that a break in the current managed float of the Yuan tied to the U.S. $ will allow a separation of the Yuan from the $.
This will only happen when the Chinese are convinced that the move will not damage the international competitiveness of China. The hoped-for stability that this brings with it will allow Chinese international trade to improve and will cause an appreciation in the international value of the Yuan.
The Central Bank of China is likely to use this appreciation as an opportunity to diversify away from the U.S. $, export the Yuan and bring in currencies that accurately reflect the spread of international trade the Chinese have at present.
This would follow the decades-long Japanese policies of exporting goods when the Yen is cheap and exporting capital when the Yen becomes expensive.
The US has wanted the Chinese to revalue their currency upward and has accused China of currency manipulation in the past. The US considers Chinese currency to be undervalued. There are US treasury concerns that Chinese currency has not accurately reflected the recent volatility in world financial markets.
source: http://www.gold-eagle.com/editorials_08/phillips042509.html
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