Sunday, February 21, 2010

China's possible currency revaluation: Advantage Gold!

An upward revaluation of its currency by China is being widely speculated in recent weeks. The rationale being to discourage Chinese exports by making them less competetive resulting in lower economic growth and hence lower inflation. The Chinese government and central bank seem exceedingly concerned lately with bringing down inflation. A valid concern given that the Chinese economy expanded by 10.7 percent in the fourth quarter of 2009, the fastest increase in two years. The Chinese central bank has already tried raising bank reserve requirements, clearly showing its intent.

Avoiding the economy from over-heating appears to be the number one priority for China. In early 2008, consumer price inflation jumped to a 10-year high of 8.7 percent. If the trend continues in 2010, inflation could be even higher. And indications are that the Chinese are continuing to spend. Household savings in 2009 was USD 48 billion less than the previous year, despite a 9.8 percent increase in real disposable income.

A stronger Chinese Yuan would make gold cheaper for Chinese traders and spur demand, boosting gold prices. Moreover, the Euro, already weakened by the Greek tragedy, doesn't look like its about to rebound soon with Portugal, Ireland, and Spain, other EU members, being in high debt situations similar to Greece (though to a lesser degree).

The USD has been gaining strength more on account of USD-EURO and USD-GBP pairs arbitrage strategies dumping the Euro/GBP rather than on account of improved fundamentals of the US economy.

In such a scenario, people looking for store of value would certainly find merit in investing in gold, I would think. I for one, surely do and only foresee an uptrend in gold prices over the next six months with positive (economy) newsflows from US doing the occasional damage and noises from Iran and North Korea providing the periodic thrusts.


Dagwood said...

But at the moment dollar seems to be winning the battle.

Anonymous said...