Precious metals have now entered their parabolic phase. The latest catalyst for gold having traded north of $1,420 is not only the ongoing collapse of Europe via surging spreads and accelerating ECB bond monetization, which in tried and true bizarro fashion have lead to a more than 100 pip move higher in the EURUSD, but the latest speech by PBOC academic advisor Li Daokui, who said that it is "absurd" that the dollar is still the reserve currency of the world. We are confident that pretty much everyone in China agrees. The likelihood that China is about to do something big in FX land was also confirmed by the biggest move higher in the CNY which rose by 0.51%, the most since the revaluation period, and also by the high yield in the one week auction, which has led some to believe that China may be willing to hike rates once again, and further weaken the dollar peg.
Overnight gold hit a fresh all time record as increasingly more people make their own decision to go back to the gold standard, away from endless currency dilution, and away from the dollar as reserve currency. Curiously, the latest salvo in the case of the latter came from Malaysia which, courtesy of the FT, we learn has "bought renminbi-denominated bonds for its reserves, marking a
significant advance for Beijing’s attempts to internationalise the use
of its currency, pitched by Chinese policymakers as a long-term rival to
the US dollar." While relatively under the radar, this development will have huge implications for global capital flows: as Credit Agricole's Dariusz Kowalczyk, says, "the central bank’s move is also expected to herald further diversification into Chinese government securities by other Asian countries. This brings the renminbi’s credibility to a whole new level. It will have a domino effect, starting among China’s trading partners in Asia. Then it will gradually spread globally." Of course, it also shows that what China does to Japan by buying up its bonds, the world can do to China. However, in exchanging the renminbi for the dollar as global reserve currency of choice, Beijing will be more than happy to allow this, even as the US, its infinite budget deficit, and its outright lack of a budget, grows increasingly isolated.
Swiss Franc Hits Fresh All Time High As Gold Surges; With SNB Out, Is CHF Becoming New Reserve Currency?Submitted by Tyler Durden on 06/25/2010 09:52 -0400
With the ECB determined to hold the EURUSD above 1.20 for the time being, the question of whether the EUR will hit parity with the CHF first is becoming more topical. The Swiss currency has been dropping consistently every single day, and just hit a fresh all time high against the EUR at 1.3491, and looks like it will hit parity with the so called reserve currency within the month. Even as gold is once again on fire (+ $10 so far today), investors have suddenly realized that with all of Europe moving its deposits to Swiss banks, it may in fact be the Swiss currency that is safest out there, backed by an increasing amount of deposits, and not to mention, gold. Should the Fed indeed announce a $5 trillion QE expansion as predicted by AEP yesterday, and Bob Janjuah a month ago, look for the "risk haven" currency to promptly regain its place as everyone's favorite short, leaving just the CHF on top, especially since the SNB now appears to have given up on intervention for good.
Jim Rickards, who recently seems to have a quota of one media appearance minimum per day, is back on King World News today, discussing his sense of a shift in sentiment within the G-20 that the dollar may be approaching its "exhaustion" limit, and that as concerns that Russia, China and Germany may be moving to a commodity backed currency (oil and gold), the G-20 will need to preempt a paradigm shift away from worthless Fed-printed paper, to another vehicle, which however, is still under the control of the "developed world." The idea would be to use the IMF's SDR as a shadow replacement to a greenback which is at current recent record high levels not due to endogenous strength, but because all its peers are far, far weaker. And in an environment in which daily FX vol is hitting daily records, and thus increasingly reducing the credibility of capital markets, a gradual transition to a currency which represents nothing but yet another "liquidity pump" as Rickards calls it, just as the dollar was in the years from just before WW1 (thank you Fed creation in 1913) all the way through the 21st century, may be the only answer in which the existing oligarchy does not lose that all important controlling factor - the currency.
Jim O'Neill, who did not make any friends within the bear community earlier today, has written an interesting paper on the IMF's Special Drawing Rights, and whether this hypernational currency can ever become a reserve currency as is, and/or with the CNY as a constituent member. While O'Neill as usual focuses on the angle of the "next paradigm" BRICs, and how they will increasingly dominate global economics, he does pose an important question: with the dollar likely to suffer the side effects of either hyperdeflation, hyperinflation, or hyperstagflation, will the next reserve currency be a diluted melange of other flawed fiat constructs (i.e., the SDR), or the currency of the one country, which for all its flaws, still has the cleanest balance sheet backing its own fiat construct. On the other hand, the question of whether this analysis is moot to begin with, and the world will revert to the gold standard as the ongoing crisis of confidence in all paper money flares up, is not raised even once... We wonder (not really) what Jim O'Neill would have to say on that particular issue.
The dollar’s status as the world's preferred reserve currency has come into question amid a ballooning budget deficit that keeps the U.S. dependent on foreign financing. It is now a matter of "when" rather than "if" the Chinese yuan will replace the U.S. dollar as the global reserve currency.
Ben "Darth" Bernanke...
"And while we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative. In combination with other factors, that likely means a continuing devaluing of the U.S. dollars versus other currencies, especially the EM currencies. Accordingly investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure."