People's Bank of China: dollar will continue to fall

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Harder to buy US Treasuries
Zhou Xin and Jason Subler

IT is getting harder for governments to buy United States Treasuries because the US's shrinking current-account gap is reducing supply of dollars overseas, a Chinese central bank official said yesterday.

The comments by Zhu Min, deputy governor of the People's Bank of China, referred to the overall situation globally, not specifically to China, the biggest foreign holder of US government bonds.

Chinese officials generally are very careful about commenting on the dollar and Treasuries, given that so much of its US$2.3 trillion reserves are tied to their value, and markets always watch any such comments closely for signs of any shift in how it manages its assets.

China's State Administration of Foreign Exchange reaffirmed this month that the dollar stands secure as the anchor of the currency reserves it manages, even as the country seeks to diversify its investments.

In a discussion on the global role of the dollar, Zhu told an academic audience that it was inevitable that the dollar would continue to fall in value because Washington continued to issue more Treasuries to finance its deficit spending.

He then addressed where demand for that debt would come from.

"The United States cannot force foreign governments to increase their holdings of Treasuries," Zhu said, according to an audio recording of his remarks. "Double the holdings? It is definitely impossible."

"The US current account deficit is falling as residents' savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world," he added. "The world does not have so much money to buy more US Treasuries."

China continues to see its foreign exchange reserves grow, albeit at a slower pace than in past years, due to a large trade surplus and inflows of foreign investment. They stood at US$2.3 trillion at the end of September.

The Dollar Is Finished

Economic historian Niall Ferguson warns that China's love affair with the dollar is fading faster than anyone realizes.

TechTicker: "The idea they don't have anywhere else to go or would shoot themselves in the foot if there were a steep decline in the dollar or appreciation of their currency
reassures many people in Washington ‘we can relax'," he says. "An appreciation of the renminbi may reduce value of their international reserves but increases the value of every other asset the Chinese own," most notably the commodity assets they have been buying all over the world.

China's "current strategy is to diversify out of dollars and into commodities," Ferguson says. Furthermore, China's recent pact with Brazil to conduct trade in their local currencies is a "sign of the times."

Perhaps most importantly, China's massive stimulus program is helping to generate internal consumption in the People's Republic, meaning local manufacturers are less dependent on exports. Because of the "rapid growth" of Chinese domestic consumption, Ferguson predicts China's international trade surplus could be gone by next year.

Gold Is Its Own Currency

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"While no major currency is likely to replace the dollar any time soon, the need for an alternative is clear, and growing...That gold has a currency aspect without being tied to any country is key to enhancing its value as an asset"

Chikako Mogi
Reuters
TOKYO -- As the dollar's dominance fades with the emergence of a multipolar world, gold may stand to gain the most of all assets, thanks to an unlikely quality -- neutrality.

While no major currency is likely to replace the dollar any time soon, the need for an alternative is clear, and growing. China among others is considering how to diversify its more than $2 trillion in foreign exchange reserves, and talk of using other currencies to trade oil or commodities continues to circulate.

Supply constraints mean there is no chance of a full revival of the gold standard era, when currencies were pegged directly to gold, but investors say gold's duel role as both currency and asset make it an almost irresistible buy for years to come as financial geopolitics add risk into global markets.

"That gold has a currency aspect without being tied to any country is key to enhancing its value as an asset," said Koichiro Kamei, managing director at financial research firm Market Strategy Institute. "The realization that gold can be turned into anything spread quickly and widely as people used it to raise dollars last year when they were short of dollars."

Gold plunged almost 20 percent in October 2008, taking a hit when investors dumped assets across the curve for cash as liquidity dried during the height of the credit crunch.

But in comparison to other asset classes gold did well, with broader commodities and equities hitting multi-year lows in the unwinding of complex positions built over the past several years.

"Globally, gold has been bought as it is re-evaluated as a stable currency," said Osamu Ikeda, general manager at Tanaka Kikinzoku Kogyo, Japan's biggest bullion retailer.

It is also seen as a simpler investment after huge losses on sophisticated financial products endangered the global financial system and plunged the world deep into recession.

After the October 2008 plunge, gold returned to the upward momentum that had carried it to a record high in March 2008, defying the downtrend in most other assets.

The Reuters-Jefferies CRB Index, a global commodities benchmark, fell to a seven-year low earlier this year just as gold was again trying the $1,000 mark.

A big part of gold's gains have been attributed to the declining dollar. The dollar index, a measure against six major currencies, fell about 14 percent since March this year while gold rose about 13 percent during the same period.

"What has been a textbook reference of gold as a currency has been given life, especially after the Lehman shock. And that has concurrently highlighted its character as an asset that performs differently from other assets," said Shuji Sugata, a manager at Mitsubishi Corp. Futures & Securities.

"Given its price movements against other assets and the declining confidence in the dollar, more funds have begun to include gold in their asset portfolios," he said.

The launch of gold-backed exchange-traded funds has also altered the way gold is viewed.

Such ETFs grew explosively over the past year after the financial crisis as retail investors entered the market, giving significant support to gold prices.

"Prior to ETFs, it was supply/demand balances and currency, gold's inverse relationship with the dollar. The launch of ETFs was an additional supportive factor for gold just as scepticism was growing about the dollar's dominance," Sugata said.

The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, saw its holdings rise to a record 1,134.03 tonnes on June 1, a 44 percent rise on the year that contributed to gold's 16 percent rise in the same period.

The growing number of investors means price action could also add to gold's volatility.

"I think the moves to the upside will be far quicker in their velocity, hitting $1,100 very shortly and then far higher over the next few years," said Peter McGuire, managing director Commodity Warrants Australia.

Central Banks to Buy 10Million Ounces of Gold Annually

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More evidence of USDollar's impending death, and coming inflation:

Jeffrey Christian, managing director of CPM Group, told the Denver Gold Forum on Monday that central banks are expected to buy 6 million to 10 million ounces of gold annually due to currency uncertainties after being net sellers in past decades. Christian gave what he said was a conservative forecast for gold to average $914 an ounce over the next 10 years.

"What we are seeing is that central banks are making the transition from large net sellers to large net buyers," Christian said. "You will see a net buying of 6 (million) to 10 million ounces per year by central banks, and that is an extremely conservative projection," he said.

Christian said that European central banks appeared to be done with their gold selling, and that central banks in emerging countries which have been building up foreign reserves were now diversifying into gold due to volatility in the dollar and other major currencies. Recently, China and other emerging economies have signaled growing interest in gold rather than stockpiling their currency reserves in U.S. dollar-denominated assets.

China issues a “Beijing Put” on Gold

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Gold should get interesting now.

Ambrose Evans-Pritchard

China has issued what amounts to the “Beijing Put” on gold. You can make a lot of money, but you really can’t lose.

I happened to see quite a bit of Cheng Siwei at the Ambrosetti Workshop, a gathering of politicians and global strategists at Lake Como, including a dinner at Villa d’Este last night at which he listened very attentively as a number of American guests tore President Obama’s economic and health policy to shreds.

Mr Cheng was until recently Vice-Chairman of the Communist Party’s Standing Committee, and is now a sort of economic ambassador for China around the world — a charming man, by the way, who left Hong Kong for mainland China in 1950 at the age of 16, as young idealist eager to serve the revolution. Sixty years later, he calls himself simply “a survivior”.

What he said about US monetary policy and gold – this bit on the record – would appear to validate the long-held belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation.

He played down other metals such as copper, saying that they could not double as a proxy currency or store of wealth.

“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market,” he said.

In other words, China is buying the dips, and will continue to do so as a systematic policy. His comment captures exactly what observation of gold price action suggests is happening. Every time it looks as if the bullion market is going to buckle, some big force steps in from the unknown.

Investors long-suspected that it was China. We later discovered that Beijing had in fact doubled its gold reserves to 1054 tonnes. Fait accompli first. Announcement long after.

Standing back, you can see that the steady rise in gold over the last eight years to $994 an ounce last week – outperforming US equities fourfold, even with reinvested dividends – has roughly tracked the emergence of China as a superpower in foreign reserve holdings (now $2 trillion).

As I have written in today’s paper, Mr Cheng (and Beijing) takes a dim view of Ben Bernanke’s monetary experiments at the Federal Reserve.

“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.

This line of argument is by now well-known. Less understood is how much trouble the Fed’s QE policies are causing in China itself, where they have vicariously set off a speculative boom on the Shanghai exchange and in property. Mr Cheng said mid-level house prices are now ten times incomes.

“If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.”

“Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down.”