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In October
2007, when gold was USD 750/oz and a US Dollar fetched 7.5 Chinese Renminbi Yuan (RMB), I published an article titled "Gold and RMB - Last Shoe to
Drop for the dollar", in which I said:
For a US family
that spends $300 to $500 a month on Chinese goods, a further 40% appreciation
of the RMB will translate into a $100 to $200 monthly cost increase. The
logic of asking the Chinese to revalue their currency upwards is no different
from asking the Saudi's to jack up their oil price further, which is no logic
at all for a US
consumer. Holding Dollars is like playing musical chairs. When the music
stops, the one holding the most Green IOUs, loses.
1. With a rapidly sinking
Dollar vs. western currencies, the Dollar's supreme image is now very wobbly.
2. Having built up a war
chest of USD 1 trillion, the Chinese need no more Dollars to shore up
confidence in its own paper within the international arena.
Combining
these two factors, the Chinese government will likely loosen the RMB peg to
the Dollar at a faster pace, and we expect a minimum of 20% appreciation in
RMB over the Dollar (i.e 5-6 RMB to 1 USD) in the
next 12 to 18 months. Gold is international money, and will follow the RMB's suit and climb to over $1,000/oz over the same
period. This gold target is a conservative estimate given that other
commodities from oil to copper have all quadrupled from their lows this
decade. Gold's low was $250/oz in 2001.
Gold
and the RMB's rise will be the final chapter to the
Dollar's status as the world's reserve currency, and the end to an era of low
priced Walmart goods made in China.
-John Lee,
October 27 2007
Now, 7 months
later:
The RMB has
since appreciated at the fastest 6-month pace on record, up over 7% and
cracked through the psychological 7 RMB/USD barrier to trade at 6.95 RMB/USD.
The talk of demanding the Chinese to revalue their currency has all but
disappeared.
3 year
RMB exchange rate to USD, no signs of slowing down
Gold met our
12 month target in 4 months and surpassed USD 1,000/oz in March 2008.
 
2 year
gold chart, ready to take another crack at $1,000/oz
Fast-rising
commodity prices and appreciating RMB are putting pushing up prices of
everything measured in USD. Unheard of in the past decade, computer prices
are going up for the first time in recent memory.
2009 Gold
Target: USD 1,300/oz based on 5 RMB to 1 USD exchange rate
Let's do an
experiment: If we fix the RMB-denominated gold price constant at today's
closing of RMB 6,425/oz, the price of gold will reach USD 1,285/oz should RMB
reach our target of 5 RMB to 1 USD by the end of 2009.
There are
those who predict a rebound of the dollar index and a protracted USD 800/oz
gold price or even lower. They just don't get the message. Gold is an
international market. Physical gold demand is mostly from Asia
and as long as Asian currencies keep strengthening, the USD-denominated gold
price will keep going up, regardless of what happens to the US dollar index.
Our 2009 gold
target of USD 1,300/oz does not factor in external elements such as
geo-politics or the speculative herd-following frenzy. I have a feeling this
once-unthinkable 4-digit target will turn out to be too conservative.
By :
John Lee, CFA
www.goldmau.com
John Lee is a
portfolio manager at Mau Capital Management. He is a CFA charter holder
and has degrees in Economics and Engineering from Rice University.
He previously studied under Mr. James Turk, a renowned authority on the gold market,
and is specialized in investing in junior gold and resource companies. Mr.
Lee's articles are frequently cited at major resource websites and a esteemed speaker at several major resource conferences.
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