China Weakens Dollar By Buying MORE Gold

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A note from the editor of this blog: Many people are acquiring Gold and Silver to help stave off inflation or to protect their wealth. Countries do the same thing as a responsible economic policy.


Posted by Brittany Stepniak – Thursday, September 15th, 2011  

A recently released WikiLeaks cable shows that China is converting much of its foreign holdings in gold; far away from the U.S. dollar.

A majority of China’s gold reserves are located here in the U.S and in some European countries.

While the U.S. and Europe have an alternative agenda to dissuade people from viewing gold as an international reserve currency, China’s upping their ante. In doing so, China aims to push other countries towards reserving in more and more in gold; leaving the U.S dollar by the wayside.

Last week, European business officials announced that China plans to make its currency, the yuan, fully convertible for trading on international markets by 2015. Zhou Xiaochuan, governor of China’s central bank, said the offshore market for the yuan is “developing faster than we had imagined” but there is no definitive timetable for making the currency fully convertible. Presently, the yuan cannot be easily converted into other currencies, because of government restrictions.

China’s gold holdings are small compared to other major economies. It has 1,054 tonnes, the sixth-largest reserves in the world, according to data from the World Gold Council. 

This only furthers the complications and growing weakness of the dollar. As China is buying tons of gold and the yuan is traded freely, the dollar’s dominance is under great pressure to maintain its status as the international reserve currency. These changes could very easily make it much more expensive for our government to borrow money, and to “run perpetual trade and budget deficits.”

The U.S should prepare for a major wake-up call, because we may not have the #1 reserve currency for long…
As a reserve currency, the US dollar is the default for international transactions. If, for example, a South Korean company wants to buy wine from Chile, chances are they will carry out the transaction in dollars. Both companies must then purchase dollars to conduct their business, leading to greater demand. The value of global commodities, such as oil, is also generally demarcated in US dollars.

Being a reserve currency allows the US to borrow at low interest rates, as central banks around the world are eager to buy US government debt. “Any country that can finance its expenditures by printing money or selling bonds is essentially getting a free lunch,” Aizenman told Al Jazeera.

With China’s apparent change of heart, that “free lunch” now might come with a hefty tab. Given the massive US trade deficit, average Americans might be sent to the restaurant’s kitchen to wash dishes if the dollar loses its status as the world’s reserve currency. 

Many experts suspect other countries will follow China’s lead and invest more heavily in gold reserves themselves. The good news for China is that large gold reserves help promote the internalization of its RMB (the official currency of the People’s Republic of China). That’s just more bad news for the U.S. and the dollar…

This further signals how crucial our relationship with China has become. Currently, “ChinAmerica” – a term for the Chinese/American relationship coined by historian Niall Ferguson – is the most significant economic relationship in the world. Three decades ago, no one foresaw this shift in dynamics.

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