China revalues the renminbi
July 22, 2005
China finally agreed to revalue its currency against
the US dollar this week. The token 2% revaluation was probably meant
to appease Washington bureaucrats more than anything else. It seems
to have worked: the White House and the Treasury applauded the move.
The magnitude of the renminbi’s revaluation
against the dollar is totally insignificant, but it was interesting
that China will in future peg the renminbi against a basket of currencies.
They did not say which currencies make up the basket, although one
can assume that it would include the dollar, the euro and the yen.
It makes sense to use a basket of currencies for a currency peg
since the US dollar is losing its hegemony as the world’s
only reserve currency. The euro block economies rival the US economy
and therefore the euro should be just as important to international
trade and foreign reserve accounts as the dollar. The same goes
for Japan; it is the third largest economy behind the US and Europe.
Perhaps the most striking result of China’s
revaluation of its currency was the effect it had on the dollar
with respect to other currencies in Asia. I expected Japan and many
other Southeast Asian countries to follow suit when China revalued
its currency and, indeed, just minutes after the Chinese announcement,
Malaysia announced that it would loosen the ringgit’s peg
to the dollar and adopt a strategy similar to China’s.
I also expected the dollar to fall across the board
following the renminbi’s revaluation, and it dropped against
the Japanese yen, the Singapore dollar, the Thai Baht, the Indian
rupee and the Korean won, to name but a few. As the dollar declines
anything bought on international markets with dollars will become
more expensive, including gold.
The US dollar-gold price moved up as the dollar fell
on Thursday although it was mitigated somewhat by the fact that
the euro also fell against the yen and other South East Asian currencies.
The big move, however, is unlikely to occur until China allows the
renminbi to appreciate more significantly.
During the Mexican peso crisis in 1995 the price of
gold in pesos doubled. When the yen fell in 1995 and 1996 the gold
price in yen rose by 35%. In 1997 the gold price rose more than
40% in both Philippine pesos and Malaysian ringgits, 67% in Korean
wons and more than 400% in Indonesian rupiahs. From 1999 to 2002
the gold price increased more than 40% in euros. We are currently
in a US dollar bear market. The gold price has already increased
by more than 60% in dollar terms and I expect it to increase another
75% or so before it’s all over.
During the past fifteen years gold protected investors
across the globe as one currency crisis after another took its toll.
It will do the same in the US, but you have to own it first.
Paul van Eeden
Paul van Eeden works primarily to find investments for his
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