China Precious Metals Strategy

   on July 23 2012 2:49 PM

The Chinese currency the Yuan is still pegged to the U.S. Dollar at a level that undervalues it substantially, provoking criticism of this exchange rate policy. The world still believes that China cannot survive and prosper without the West to fund its development, and so most analysts are focused on a hard landing for China.

Nevertheless, what is really happening is that new currency swaps are forming the backdrop of Chinese metals accumulation and production. In essence, China is gradually amassing the lion’s share of global wealth in the form of hard assets.

An amusing quote posted by Tyler Durden at ZeroHedge.com sums this situation up rather well:

While the insolvent developed world is furiously fighting over who gets to pay the bill for 30 years of unsustainable debt accumulation and how to pretend that the modern 'crony capitalist for some and communist for others' system isn't one flap of a butterfly's wings away from full on collapse mode, China is slowly taking over the world's real assets.

China is Gradually Shifting the World Away From Using the U.S. Dollar

Recent headlines from around the world have focused on how China is spearheading a shift away from the U.S. Dollar as a reserve currency. Some articles on this topic from over the last year were entitled:

• World's Second (China) and Third Largest (Japan) Economies to Bypass Dollar, Engage In Direct Currency Trade

• China, Russia Drop Dollar In Bilateral Trade, China And Iran To Bypass Dollar, Plan Oil Barter System

• India and Japan Sign New $15bn Currency Swap Agreement

• Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says

• India Joins Asian Dollar Exclusion Zone, Will Transact With Iran in Rupees

• The USD Trap Is Closing: Dollar Exclusion Zone Crosses the Pacific as Brazil Signs China Currency Swap

• Chile is Latest Country to Launch Renminbi Swaps and Settlement

• Central Bank Pledges Financial Push in Africa

• Yuan Spreading - China Creating Dollar Exclusion Zones

The movement first began in Asia, but then spread to South America, and now to Africa. These may seem like small steps, but the ultimate impact could well be a dramatic shift out of the U.S. Dollar. This will make it harder and harder for the United States to continue to sustain its twin deficits and fund its massive national debt.

China Encourages Precious Metal Ownership

Another important Chinese policy change has been to legalize precious metals ownership recently. Even silver ownership has been overtly encouraged by Chinese authorities.

In effect, by encouraging domestic hard asset ownership, this creates a third tier or leg of support for the accumulation of precious metals.

This means that China is becoming a global force in the import, production — and now the domestic ownership — of precious metals. China is already a major producer and importer of gold. The country was also a net exporter of silver, but it has now become a net importer of silver.

To further support the growing Chinese precious metals market, new metals exchanges are opening.

Could China be Considering a Metals Backed Currency?

While this shift in emphasis is incremental, it could easily reflect a strategic movement by China toward a new reserve currency that might be backed by gold or other precious metals. Silver has been used as an official currency in China before, dating back to the Han Dynasty that ruled from 206 BC to 220 AD.

Perceptually speaking, such a trend will initially be ignored and downplayed by both sides.

China would rather buy precious metals while their prices are low and unwind their massive U.S. Dollar positions without creating a market panic. Furthermore, to strengthen its funding position, the United States will continue to chant the strong Dollar mantra.

Nevertheless, as the official announcement of such an intention approaches and Chinese metals buying becomes increasingly evident, the affected precious metals market(s) will have little choice but to rally substantially.

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