Financial Times/Hudson Lockett, Tom Hancock and Charles Clover/12-7-2016
“The fifth consecutive monthly fall points to growing difficulty for policymakers. Since a sharp renminbi depreciation in August 2015, Beijing has sought to combat more severe softening against the dollar by selling the US currency from the central bank’s forex reserves.”
MK note: Falling Chinese reserves represent pressure on the yuan which in turn imposes two frontline effects important to gold owners: (1) increased gold demand within China among its citizenry and institutions, and (2) increased pressure on U.S. interest rates as bond principle erodes, on the 10-year Treasury for example, due to the selling. (“Selling US currency” translates to selling US Treasuries) Koos Jansen, the China gold specialist, reports strong on-going gold demand in China even with import restrictions, though not at the record levels of the last few years. A big behind the scenes problem, as the FT article points out, is that rising U.S. interest rates means emerging countries, including China, will be paying significantly more on their dollar-denominated debt than previously. China, in fact, is attempting to keep the yuan from cratering by selling U.S. Treasuries, but the net effect is to push dollar rates and the dollar even higher, which in turn puts more pressure on the yuan. Eventually, this self-perpetuating tailspin could translate to significant systemic risks as the risk of default spreads from emerging to developed countries and their banks. Odd markets. Odd times getting odder by the day.
