China Makes Plans To Diversify Its Dollar Reserves

The storms are building for the dollar, and the US economy, folks… There are a couple of things happening this week that could give us a clear indication as to which road we’re going to take… the Big Events Week! But first, while we were pounding down our Easter feasts, the Chinese were making plans to diversify their $3 trillion in reserves, and reduce their dollar holdings… Here’s the skinny…

OK… Remember last week when I told you that China’s Central Bank head, Zhou, had said that China had too much in reserves? (Read dollars, folks)… Well, this past weekend, a member of the monetary policy at the central bank, Bin, said, “$1 trillion dollars in reserve would be sufficient”… So, in case you’re searching for a calculator right now, (I know I did! HA) that would be a “skimming off the top” of $2 trillion dollars! It just so happens that $2 trillion is about the same amount that the Fed Reserve has printed with their QE1 and QE2!

Now, the question would be, just what are they going to do to get rid of $2 trillion dollars? Ahhh, grasshopper… We all know what they are going to do… They’re going to buy resources for their economy… They’ll spread a little to the problem children of the Eurozone, and they’ll invest in their infrastructure… The sleeping giant that my dad used to warn me about when I was a kid, has awakened, eh?

OK… So with that news spreading throughout the world last night, gold and silver, as they should, took off for new levels… Gold $1,517.20, and silver $49.10… It’s just crazy out there, folks! Investors are running for the cover of these metals, for they are the True Store of Wealth… Or, as I always call them, the “uncertainty hedges”… And brother are we walking in uncertain times right now!

Oh… And I guess it would be fair to say that this news from China has caused some widespread dollar selling… Even with most of Europe, Australia, and Hong Kong on holiday last night and today, the fear in the markets is that of “don’t get left holding dollars”…

Now… The Fed Reserve will meet this week, and here’s where I think the circuit breaker that I talked about last week will get turned on… So be careful this week, folks… The Fed could pull a rabbit out of its hat, ala-Bullwinkle, and come to save the day… (Yes, I’m laughing hysterically right now) Or… Top Fed Head Big Ben Bernanke, will simply repeat what he, and his fellow, quantitative easing-loving Fed Heads have had to say recently, which is that “it’s too early to pull the stimulus away”… And they are going to go the distance with QE2, which is the end of June…

A few weeks ago, I talked to you about what happens at the end of June when QE2 officially ends… I was concerned that with QE2 ending the markets would take that as a signal that the Fed believes all is OK in the US and a flight back into dollars could take place… For Treasury yields will certainly go higher with the Fed removed as the major buyer of them. When the Fed removes their stimulus – or “financial cocaine” as I call it – stocks are going to get hit with a hammer… and all the flow will be into Treasuries…

But, that only lasts as long as it takes for the economy to fall on its face, after going cold turkey, and then the Fed will be back with QE3, and QE4, etc. This shouldn’t be anything new to your eyes to read, for I’ve talked about this for some time now…

My friend, old colleague, and writer extraordinaire, David Galland, talked extensively about this in his letter last Friday, of which I have a snippet of here:

The politicians and their friends down at the Fed can pretend, as they do, that the overhang on the economy of some $14 trillion in debt, and another $50 trillion or so in longer-term entitlements, is much ado about nothing. This view of theirs is confirmed by the current budget discussions that talk of slashing $4 trillion out of federal spending over the next 12 years – but ignore that this slashing still anticipates annual deficits on the order of $1 trillion. There are facts and fictions in this universe of ours, and it’s a fact that the notion of spending our way to better days is a fiction.

And so, in my mind, there is no question that the Fed will ultimately be forced to unleash QE3 and, as Marc Faber [has] so eloquently stated…that will be followed by QE4, QE5 and so on through QE26 – or whatever number is in force at the time of the dollar’s collapse.

You can read David’s excellent piece titled “Forlorn Hope” by clicking here.

OK… So, it’s all gloom and doom this morning, I apologise for that… But, this is the kind of stuff you won’t get from your cable or local news, or Katie Couric on the national news! So, with all the gloom and doom, I’ll try to soften it up a bit, with some thoughts of other things…

Silver is up $1.91 this morning… That’s almost 2 bucks! WOW! I remember when you would be happy with a $2 move in a month! But gold and silver aren’t the only anti-dollar assets moving higher this morning… The euro (EUR) is knocking on the 1.46 door once again, and the Aussie dollar (AUD) hit, yet another post-float all-time record high overnight of $1.0777… (The Aussie dollar has backed off that a bit since hitting the new high). The Canadian dollar/loonie (CAD) is back above $1.05…

Speaking of the loonie… Last week, I said something about how the Canadian government didn’t care for the loonie above $1 because it hurt tourism… And a Canadian reader reminded me that it’s not just tourism, but manufacturing that suffers when the loonie is so strong… Correct-o-moon-do! But, right now, with energy prices soaring, and pushing inflation higher, the Canadian Central Bank (Bank of Canada) would be wise to allow the loonie to help with the heavy lifting with regards to fighting inflation.

The Economist had a good story this past week, regarding Singapore… Yes, even The Economist is jumping on our Singapore bandwagon these days… Shoot Rudy, I saw right here in The Daily Reckoning where they were talking about the Singapore dollar the other day! Here’s a snippet…

During the past several years, Singapore has emerged as one of the leading financial centres of the world, partially thanks to its ability to take advantage of upheaval, according to The Economist. While some financial hubs, such as Switzerland and London, have tried to balance attracting bankers and punishing them for some activities, Singapore has welcomed them with open arms. Thousands of financial-services companies have registered with the city-state’s monetary authority, and derivatives and other ancillary operations have thrived.

Remember what I told you a week or so ago about how China had chosen the Singapore Central Bank as a clearing bank for renminbi (CNY)… All of this noticing of Singapore is going to carry over to the Sing dollar…and that’s a good thing!

Another country that’s beginning to get a lot of recognition is Russia… And with the price of oil trading near a 30-month high at $112.64, it only makes sense that the ruble (RUB) has reached a 27-month high! Let me say that as long as you have protection like our BRIC MarketSafe CD did with 100% principal protection, owning rubles is OK… Otherwise, without protection, I wouldn’t touch them with your 10-foot pole!

Remember, last Monday? The big news was that S&P had downgraded the US rating to a negative outlook… One would have thought that this news would be the tipping point for Treasury values to plummet… but NOOOOOOOO! For some strange reason the markets are taking the S&P downgrade and thinking that this is a warning to the president, and that something will be done about it… OK… Will someone please come to help me off the floor; I fell there laughing so hysterically! But not just because the president won’t do anything… The lawmakers won’t either! Oh, I know, they’re trying, but in reality, folks, unless you’re talking about something more than $4 trillion over 10-years, that’s like removing a bucket of sand from the beach… Who’s going to notice?

And of all of you who live and trade based on the “Big Mac Index”… The Chinese renminbi (like we needed the Big Mac Index to tell us this), is among the most undervalued currencies along with The Hong Kong dollar (Honkers)… I’ll try to remember to look at this again in about 6 months, and then in a year, to see how much it has narrowed… Right now, a Big Mac costs the equivalent of $2.18 in China, and $3.71 here in the US.

Then there was this… A couple of weeks ago I told you how a very smart friend of mine said that silver had “gone parabolic” which is chartist talk… Well, if it had gone parabolic two weeks ago, I don’t know what the chartists are saying about it now, for it is $9 higher than it was two weeks ago! I have to tell you that last week, I received a note from a “source” that said the CFTC had given the Big Banks that had major short positions in silver, notice to begin to close them out… If that’s true, then it certainly explains the $9 two-week move, eh? Now, I don’t know that it’s true… But, it certainly makes sense for it to be true, and would explain why the chartists are still saying “sell at these levels” for they don’t know about the rumour…

To recap… China throws a cat among the pigeons with members of their monetary policy calling for a reduction of their dollar reserves, which would be about equal ($2 trillion) to what the Fed has printed during QE1 and QE2. This has sent investors running to gold and silver. Gold has set a new record level, and silver has a $49 handle this morning! The FOMC meeting this week will tell us a lot about the direction of the dollar… You know, I just thought of this… When it eventually comes down to the cheese that binds, the FOMC will have to decide whether they want to save the dollar, or the stock market…

Chuck Butler
for The Daily Reckoning

China Makes Plans to Diversify Its Dollar Reserves originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2 .

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