July 24, 2005 –After nearly a decade-long
fixed exchange rate, it was announced Thursday that the
Chinese yuan was to be severed from its seemingly steadfast
link to the U.S. dollar. Instead, it is to be allowed to
“float” against a yet to be named basket of
currencies. These are said to include the yen, the euro,
the dollar and a number of other Asian monetary units. Further,
when the contents of the basket is set, the yuan will be
managed and the basket kept within a 3% daily trading band.
It remains to be seen how the various currencies in this
basket will be weighted, and whether this is the first step
in a series of similar yuan devaluations, or the last.
The Chinese government has been the object of an ongoing,
escalating attack for the past few years. As the world’s
various major economies have begun to stall, China has become
the global scapegoat for this condition. It has been repeatedly
charged that the Chinese have kept their currency artificially
undervalued in order to maintain an economic advantage over
its trading partners. This in turn generated greater employment
in China while simultaneously depriving workers in other
lands of their jobs. Allegedly for this reason, and in order
to curry favor from their suffering constituents, the politicians
of a number of major countries have chastised the Chinese
The yuan was first pegged to the dollar in 1994. Through
a series of modest increases it rose in value until in 1997,
it was fixed to it. The recently announced upward valuation
of the yuan was a mere 2.1% increase against the dollar.
This is a token amount that I believe was arrived upon to
primarily quiet the Chinese government’s antagonists.
To my mind, it will have little if any impact upon the balance
of trade between China and the United States. It can, however,
impact some marginal Chinese exporters who primarily supply
their products to the United States. Many of these primarily
nascent companies may find themselves out of business or
approaching the government for subsidies.
The yuan’s revaluation cheapens dollar denominated
goods and services offered in China, thereby making them
more affordable to their local consumers. Simultaneously,
it makes more dear those items that originate in China and
find their way into U.S. markets. In the end, the yuan’s
revaluation will likely be insufficient to alter the flow
of business between the two nations, affect prices in the
U.S., or impact business conditions in either country.
Do not be led astray from recognizing the true implications
and importance of this monumental announcement! I am confident
that this will be the first in a series of sporadic incremental
increases in the yuan’s value. They will be against
the U.S. dollar and likely to a lesser extent the currencies
of their other major trading partners. This will allow China
to gradually gain a stronger foothold in the world economic
arena, which in the not too distant future they may greatly
influence, and even dominate.
Throughout history nations with strong currencies have typically
not only been highly influential in the world’s marketplace,
but have often taken leadership roles in both politics and
the military. When one country’s monetary unit was
greatly desired by those living in other domiciles, it meant
that they offered goods and services that were either highly
desirable or were more reasonably priced than those of their
global competitors. Further, under the gold and gold-exchange
standards it indicated that the country was also fiscally
responsible. The stability and strength of their monetary
units attracted large capital inflows due to the perceived
safety that their countries and currencies afforded. I believe
that the recently announced revaluation of the yuan is China’s
first step toward achieving these goals.
If the yuan is allowed to continue to appreciate, it will
benefit a number of conditions within China. It will lessen
their cost of imported commodities such as oil, iron ore,
cotton and copper. These are priced in dollars and are greatly
consumed by their industrial and manufacturing bases. This
can act to maintain or even reduce their general price levels.
Further, they will be capable of purchasing American-made
products at a discount due to their stronger currency.
China’s benefits may be huge. Over time, as their
medium of exchange further appreciates, it will act to stem
the influx of dollar credits entering China. This will result
because the cost of their exports will become more prohibitive
to Americans and fewer purchases will be made. This will
limit the increase in their money supply thereby reducing
their inflation rate. Further, it will simultaneously help
to shore up their banking system and tend to moderate their
overheated economy. Additionally, the average Chinese citizen
will experience an enhanced standard of living. This will
result from the lowered local prices of both U.S. imports
as well as their commodity laden domestic goods.
The major negative effects of China’s announcement
will be upon the United States and our dollar. First, by
severing its tie to the dollar, it somewhat distances itself
from its dependency upon our currency and will simultaneously
increase the yuan’s reliance on the currencies of
the “basket” countries. Thus, the dollar’s
status and desirability as the premiere global monetary
unit will suffer. Next, as the yuan rises against the dollar
it will act to export inflation to our nation.
One of the prime reasons that prices have been subdued in
the U.S. was due to not only the cheap Chinese import prices,
but to the affect that it has had upon our local manufacturers.
They have been forced to absorb much of their cost increases
in order to remain competitive with Chinese imports. Now,
they will be able to raise their prices in sync with the
yuan’s upward adjustments. Also, American bond prices
will likely weaken. This will result from the reduction
of Chinese purchases of our Treasuries as their dollar inflow
Our nation has been hemorrhaging dollars through our ongoing
current account and trade deficits. During the past few
years the Chinese have been the second largest dollar acquirer.
They used many of these to purchase U.S. Treasuries and
presently hold about one quarter of a trillion dollars of
our debt. If the Chinese move away from the dollar in favor
of other currencies, the support that they have given our
bond market will dwindle. And, with it, U.S. bond prices
can plummet causing our interest rates to soar.
The U.S. housing market and economy rest on fragile ground.
Any rise in our interest rates has the potential to knock
the legs out from under them. This can cause home prices
to fall precipitously which in turn can shock consumers
into withdrawal, and damage our business sector.
On a positive note, if the yuan significantly appreciates
against the dollar, it will positively impact our manufacturing
base. This may act to reverse its decade long decline, and
may even stimulate it to expand, thereby increasing our
Finally, gold has the potential to be a major beneficiary
of a sustained rise in the yuan. Given the fact that the
dollar has heretofore been seen as the world’s primary
monetary safe haven, it has attracted great demand. If the
dollar loses its prominence in the world’s eyes, gold
will be the likely entity that will fill that void and most
All of the major economies have been aggressively inflating
their money supplies. This has sent tens of billions of
dollars of the primary currencies searching for safety.
A floundering dollar is surely destined to cause a redirection
of much of this money to gold. Given the fact that the yellow
metal recently broke through major overhead resistance in
the euro, yen and Swiss franc, further strength in these
currencies should attract substantial gold buying from these
A negative consequence that a rising yuan may have in China
is damage generated by a potential influx of speculative
money. Given the yuan vs. dollar revaluation, hedge funds
and other speculators are carefully assessing their future
exchange rate potential. It is likely that when the composition
and weightings of the soon to be announced “basket
of currencies” becomes public, the currency pirates
may shortly act. They will be better able to evaluate the
accuracy of the parities between the yuan and the currencies
of its trading partners in the basket.
More importantly, this group will recognize that we have
not yet seen the last increase in the yuan vs. dollar parity.
If a substantial amount of these hedge funds and traders
arrive at the same conclusion their buying of renminbi in
anticipation of this event, can force a sharp upward revision
in its value. They may act, as George Soros did over a decade
ago against the British pound. They will not drive it far
lower as they did with the pound, but may instead carry
it decidedly higher.
When dollars enter China most are exchanged by their central
bank for newly created yuan, thereby increasing their money
supply. This is the prime reason for their present level
of inflation. The received dollars are then used to purchase
U.S. Treasuries. If speculators and hedge funds feel confident
that the yuan’s rise over time will produce important
profits, a substantial inflow of dollar credits may enter
their country. They will buy yuan with the expectation of
selling them later when they are worth more for a profit.
In this event, the Chinese government may be forced to capitulate
and quickly revalue the yuan in order to prevent further
internal damage. While this occurrence is far from assured,
Chinese officials must be vigilant.
No one knows how the yuan’s subsequent rise against
the dollar will unfold. Further, we do not yet know the
composition of the Chinese basket of currencies against
which its currency will float. As Richard Russell (dowtheoryletters.com)
opined after the announcement, it might even include gold!
If this is destined, gold will quickly be thrust back into
the limelight of the world’s monetary system. But,
what we do know is that the dollar’s hold on the throne
of global currency domination has been deeply shaken, and
is now in jeopardy.
The above was excerpted from the July 24,
issue of Financial Insights, and was completed last weekend.
Yesterday, Tuesday, the Chinese People’s Bank released
a statement denying that they had plans to further revalue
the yuan against the dollar. This brought to mind a situation
of which I learned during the 1960's, and that was not an
Governments have forever done their best to defend their
currencies. “Jawboning” was a commonplace term
used during the 1970's and earlier. It referred to a government’s
attempt to apply pressure and frighten market participants
who were trying to drive lower their currencies. One method
that was often utilized, and frequently occurred just prior
to a devaluation, was an official statement that they would
I cannot say with certainty that the recent revaluation
of the renminbi will be followed by another as I would have
expected during the earlier era. However, the immediate
Chinese response to the numerous statements that the yuan
will decline over time, gave me pause. I now must wonder
if the currency pirates have already begun an attack. In
any event, I believe that China’s Central Bank is
quite concerned, and may act in this regard far faster than
many onlookers believe.
The above was excerpted from the August 2005
issue of Financial Insights © July 24, 2005.
I publish Financial
Insights. It is a monthly newsletter in which I discuss
gold, the financial markets, as well as various junior resource
stocks that I believe offer great price appreciation potential.
Please visit my website www.financialinsights.org
where you will be able to view previous issues of Financial
Insights, as well as the companies that I am presently following.
You will also be able to learn about me and about a special
I expect to have positions
in many of the stocks that I discuss in these letters, and
I will always disclose them to you. In essence, I will be
putting my money where my mouth is! However, if this troubles
you please avoid those that I own! I will attempt wherever
possible, to offer stocks that I believe will allow my subscribers
to participate without unduly affecting the stock price.
It is my desire for my subscribers to purchase their stock
as cheaply as possible. I would also suggest to beginning
purchasers of these stocks, the following: always place
limit orders when making purchases. If you don't, you run
the risk of paying too much because you may inadvertently
and unnecessarily raise the price. It may take a little
patience, but in the long run you will save yourself a significant
sum of money. In order to have a chance for success in this
market, you must spread your risk among several companies.
To that end, you should divide your available risk money
into equal increments. These are all speculations! Never
invest any money in these stocks that you could not afford
to lose all of
Please call the companies regularly.
They are controlling your investments.
FINANCIAL INSIGHTS is written and published by Dr. Richard
Appel and is made available for informational purposes only.
Dr. Appel pledges to disclose if he directly or indirectly
has a position in any of the securities mentioned. He will
make every effort to obtain information from sources believed
to be reliable, but its accuracy and completeness cannot
be guaranteed. Dr. Appel encourages your letters and emails,
but cannot respond personally. Be assured that all letters
will be read and considered for response in future letters.
It is in your best interest to contact any company in which
you consider investing, regarding their financial statements
and corporate information. Further, you should thoroughly
research and consult with a professional investment advisor
before making any equity investments. Use of any information
contained herein is at the risk of the reader without responsibility
on our part. Past performance does not guarantee future
results. Dr. Appel does not purport to offer personalized
investment advice and is not a registered investment advisor.
The information herein may contain forward-looking information
within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of
1934. In accordance with the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, the statements
contained herein that look forward in time, which include
everything other than historical information, involve risks
and uncertainties that may affect the company's actual results
of operations. © 2005 by Dr. Richard S. Appel. All
rights are reserved. Parts of the above may be reproduced
in context, for inclusion in other publications if the publisher's
name and address are also included for credit.