How long can the Dollar Last as the World’s Reserve Currency?

[Solve et Coagula]

How long can the Dollar Last as the World’s Reserve Currency?

The big question is how long can the dollar last as the world’s reserve currency? Needless to say, that is not an easy question to answer. We recently called the top on the dollar at 89.50 on the USDX. The USDX is six currencies versus the dollar on a weighted basis. More than a year ago the dollar hit a low on the USDX at 71.18. A phenomenal rally ensued from that level expedited by de-leveraging and the closing out positions within the carry trade. A good example of the carry trade was when a bank in NYC borrowed yen. At ½% interest, sold the yen for dollars and bought dollar denominated securities.

All of that is now history as the dollar comes under increasing pressure. We believe the dollar could test 71.18 this year. We also believe the dollar could break down to 40 to 55 over the next few years. The collapse of the dollar is certain. The Treasury and the Fed have committed the American taxpayer to $13.8 trillion of debt and before the dollar goes where it is ultimately going that figure could reach $30 trillion.

In modern times such fiscal and monetary irresponsibility is unparalleled. This abdication of moral responsibility has already begun the process of dollar deterioration and rising interest rates. The result will soon be hyperinflation.

The collapse may be disastrous for all countries, but it is going to be equally disastrous for the corrupt who have brought us to this sad situation. Hopefully as painful as it will be it could create many new opportunities for some. One thing we see as certain is that the elitists will find themselves targets of civil and criminal charges and targets of contempt and derision. The new world order they so arrogantly and confidentially predicted with one world government will again have been a failure.

There is no question where China is headed in this currency war to dump the dollar. They continue to accumulate gold with the intention of having a gold backed currency - something America is, we believe, incapable of doing. Such an ongoing pressing event has to put continual downward pressure on the dollar. China is already by passing the dollar reserve system by settling in other currencies, using barter and through swap arrangements, major changes are in the process of taking place. We do not believe the yuan will be the reserve currency of the future. A better idea is to have a weighted basket of 10 major currencies as a world benchmark. China is heavily dependent on exports and as yet does not have domestic demand to relieve pressure when exports fall. They are also still a dictatorial, communist society in power by force. They also still have an enormous population and wages are still dreadful even though they have increased 10-fold over the past 15 years. Politically both China and the US face populations that are profoundly unhappy and if major changes are not made in both societies, both are ripe for revolution.

Wednesday’s 10-year Treasury auction wasn’t all it was cracked up to be. The yield was 3.99% with 46.8% allotted at the high bid. The bid/cover was 2.62 versus the average of the past ten auctions of 2.40. Indirect participation, of foreign central banks was 34.2% versus an average of the past ten auctions of 28.23%. The only reason the sale went well was that the note had to be lifted 13 bps to 3.99% in order to attract buyers. In addition the Fed had to buy $3.5 billion in longer term maturity bonds and prop up the auction. They cannot fool us. The system sinks into deeper trouble every day. All we can say is you had better own gold and silver. What the Fed did was buy 18.4% of the auction with money they created out of thin air – more monetization.

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[roadkill]

There is no question where China is headed in this currency war to dump the dollar. They continue to accumulate gold with the intention of having a gold backed currency

Absolute fucking rubbish. The Chinese are not that stupid even if American gold bugs are. I am willing to be proved wrong if you can cite authoritative sources reporting that China is acquiring a billion dollars of gold a month.

[Fredfredson]

“Less Awful” GDP, Watching the Fed, Dividend Strategies, China “Monetizing” Gold, and More! | 5 Min. Forecast

“China is monetizing its gold!” exclaims Byron King after chewing for a few days on China’s announcement that its gold reserves have grown 76% over the last six years.

“It makes you wonder what the Chinese were thinking back in 2003,” he says. “I happen to know, courtesy of an acquaintance at the Naval War College, that the Chinese were quietly forecasting that the U.S. would destroy its dollar by going to war in Iraq.

“The Chinese gold purchases evidently were part of a slow and steady buying program between 2003 and the present,” Byron reasons.

“But in keeping with a nation where youngsters get their Sun Tzu with their mother’s milk, the Chinese went through an internal debate over whether to add the gold holdings to the official Chinese monetary reserves. That is, if the gold was not ‘monetary,’ then it was just another nonmonetary investment commodity like iron ore or copper or petroleum,” and it could be put on the books of a Chinese sovereign wealth fund.

“But now, with the announcement by the Chinese Central Bank, it appears that the debate is resolved. The gold has been added to Chinese monetary reserves. This action by China is part and parcel of an under-the-radar, global effort to rehabilitate gold as a monetary reserve asset.”



China’s Gold Purchases Another Wild Card in Market
By Brien Lundin • Jun 8th, 2009 •

China’s Gold Purchases Another Wild Card in Market | Personal Liberty Digest

China’s Gold Purchases Another Wild Card in Market

It wasn’t long ago that I was noting how the Federal Reserve’s sudden embrace of quantitative easing, combined with the orgy of spending in Washington and international calls for the usurpation of the dollar as the world’s reserve currency, had sent gold soaring.

In more recent days, the trend has accelerated. This time, Washington’s increasing involvement in the economy, and the politicization of American business, has sent overseas investors fleeing the dollar. Capital goes where it is safe and well-treated, and right now there are safer alternatives than the U.S. for foreign capital.

In short, investor sentiment has shifted from fear of financial collapse to fear of rampaging inflation and a dollar collapse. And gold has been the beneficiary, as it has taken off on a dizzying rally back toward $1,000.

While the long-term picture for gold remains very bright as the global supply of fiat currency is multiplied over the coming months and years, there has been another recent development with important implications not only for gold, but the entire world. To wit: China has announced that it has been secretly buying gold since 2003.

In an interview published by the official Xinhua news agency, Hu Xiaolian, head of the State Administration of Foreign Exchange, revealed that China had purchased 454 tonnes of gold since 2003, raising its gold reserves by about 75 percent, from 600 tonnes to 1,054 tonnes.

That ranks China fifth in official gold holdings among nations, although the IMF and the SPDR Gold Trust ETF (GLD) still hold more than the Middle Kingdom.

The gold bulls seized upon China’s revelation as having tremendous bullish implications for the metal.

After all, the nation increased its gold holdings by three-quarters, siphoning hundreds of tonnes from the market. But the gold bears were quick to assert that China’s gold purchases weren’t a big deal, since their foreign currency reserves grew at about the same pace. As a percentage of its overall foreign reserves, gold stayed virtually constant from 2003 to today, averaging around 1.6 percent to 1.7 percent.

I think both sides are missing the point here. The significance of China’s purchases is more bullish than the bears would admit, and less dramatic than the bulls would like. In short, the importance of China’s admission isn’t what it has done, but what it can now and likely will do in terms of gold purchases.

Prior to this announcement, analysts could only guess as to China’s intentions as far as gold purchases. Many bulls hoped the nation was buying, many bears dismissed the idea… but no one simply assumed that China’s inscrutable leaders were accumulating gold along with U.S. dollars.

Now that they’ve come clean, the outlook for global gold supply and demand is fundamentally changed, for a number of reasons.

First off, when you take this announcement in context with the recent, repeated calls by China’s leadership for the ouster of the dollar as the global reserve currency, it seems likely that the stage is being set for a reduction of their dollar reserves in preference for, well, gold.

The upside posed by such a development is significant, but not earth shattering. It’s true that Western nations hold an average of 15 percent of their reserves in gold, and an increase in China’s gold allocation to that level would set the market afire. But, from a practical standpoint, that just won’t happen, at least not in anything short of a glacial time frame.

China simply couldn’t buy gold in the quantities, or at the prices, appropriate to lift gold to 15 percent of their reserves. Still, it appears that China’s leadership is quite motivated to reduce their dependency upon the U.S. dollar, and increase their holdings of gold and other tangibles.

In fact, if there is any open secret regarding official Chinese purchases recently, it is their stockpiling of strategic commodities, particularly copper. Copper prices have benefited greatly from China’s aggressive purchases this year.

One can rightly ask, is gold next on the shopping list? And has the official chatter regarding gold and the dollar simply been Beijing’s warning to Washington and the rest of the world of what is coming?

Good questions. And we’ll get the answers when China wants us to get them, and not before. You can bet any announcement will come after their major purchases are done.

A second interesting point regarding China’s purchases is that all of the supply/demand analyses of the past six years have been wrong. Because China’s purchases were unknown, and therefore couldn’t be credited to that nation or official purchases in general, other demand categories were credited with the 454 tonnes China was buying.

Hu stated that the purchases came from domestic production, but it seems likely that some significant percentage had to come from outside the local market. Regardless, assuming that aggregate global supply and demand figures over the time period are accurate, then it makes no difference whether the purchases came from gold inside or outside China’s borders.

So we can assume that global jewelry and investment demand totals since 2003 weren’t as high as originally envisioned — because we can subtract 454 tonnes, in some mix, from these categories.

One can argue that this is bearish. I’ll take a more optimistic viewpoint: It shows that these demand sources have been less significant so far, and therefore have more room to grow.

And if China’s purchasing program accelerates, or even if it remains constant, then increases in other demand categories will have a much more pronounced effect on the overall market.

All in all, it has to be encouraging that China has been buying gold, and is likely to continue doing so, while the nation publicly bashes the dollar.

[roadkill]

Leave aside speculation by gold bugs and look at some facts:

April 24 (Bloomberg) -- China boosted its gold reserves by 76 percent since 2003 and has the world’s fifth-biggest holding by country, said Hu Xiaolian, head of the State Administration of Foreign Exchange.

The nation increased its reserves by 454 tons to 1,054 tons through domestic purchases and refining scrap metal, Hu said in an interview with the Xinhua News Agency today. The amount is more than Switzerland’s 1,040 tons, World Gold Council data show, and is worth $31 billion at current prices.

China has the world’s largest foreign exchange reserves at $1.95 trillion as of March 31, according to state administration data. The holdings have climbed about sixfold in the past six years as the country had record trade surpluses and inflows of foreign investment. Gold prices have almost tripled to more than $900 an ounce from $337.

“Chinese foreign-exchange reserves have absolutely exploded in the past few years,” said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. “We shouldn’t be surprised that they’re adding a lot of all asset classes. I don’t think they’re shifting away from U.S. dollars into gold.” [...]

Furthermore:

[...] China's gold reserve has expanded slowly over the past six years compared with the pace at which its foreign exchange reserves have grown in the same period.

If China bought all the gold (more than 8,000 tons) held by the US, which is worth about $280 billion at most, it would absorb only one-ninth of China's nearly 2-trillion-yuan foreign exchange reserves. The country would still face the same problems about what to do with the bulk of its reserves as it does now.

It would also be impossible for China to boost its gold reserve to more than 8,000 tons in a short period of time. There is not enough gold produced domestically and if China went to the international gold spot market, gold prices would skyrocket, making it hard to buy a large amount. [...]

The essential feature of a gold-backed currency is that holders of paper money (or bank deposits) have the right for their holding to be swapped for an equal value of gold.

It is absurd to imagine a gold holding of $31 billion as sufficient to back reserves of $1.95 trillion. World gold production is currently around 2,500 tonnes per year. There is not enough gold in existence to back China's currency.

To suggest that that is what China is trying to do is absolute rubbish.

All that can be said is that some people, who should know better, are publishing speculation on the subject.

[Justin]

It is absurd to imagine a gold holding of $31 billion as sufficient to back reserves of $1.95 trillion.

That is part of the problem. The dollar is actually worth much less than people think. The Chinese realize this and appear to be trying to get themselves ready for the day when the correction to the value of the dollar occurs.