Another Take on Yuan Devaluation: Revalue Versus Gold

China's money supply has expanded beyond what its reserve's warrant and its clear China's forex reserves have turned the corner from growth to contraction.
When reserves are flat or falling, the yuan weakens.
A devaluation of the renminbi versus the U.S. dollar is coming, but what if instead of revaluing the currency versus the U.S. dollar, China decides to announce a target price for yuan/gold?

Alasdair Macleod writes: Credit Deflation & Gold
This will also surprise market traders who think that a continuing collapse in Chinese stock markets will force liquidation of gold holdings by the Chinese public. There is little doubt that distressed speculators will come under pressure to sell gold if they own it, but this argument ignores the certainty that during a credit contraction government-issued currencies always weaken against gold. So having acquired substantial quantities of gold for itself and having also ensured it is widely held by its public, the Chinese government is arguably in a more compelling position to encourage a gold revaluation as a means of stabilising her economy in a credit crisis than America was eighty years ago. It will be China's only option, and if the government doesn't go for it, China's middle classes certainly will.

We are already seeing the People's Bank of China engaging in reflationary policies to contain the stock market crash. This is a normal central bank response. Doubtless it will maintain the managed peg against the US dollar, partly because China is committed to building confidence in her own currency as a replacement for the dollar in international settlements, and partly because currency devaluation would be seen in the markets as a failure of economic policy. Furthermore, China can reasonably expect US monetary policy to do some of its reflationary work for it.

Therefore, instead of devaluing against the dollar, a rise in the yuan gold price is almost certain to occur.
China has a history of revaluations, the last coming in 1994. It set off an economic boom that lasted 20 years. Why not go back to old playbook?

I anticipate an incredible bull market will begin if the yuan price of gold begins to rise, especially if real estate and equities remain soft.

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