Rise of Chinese Currency May Spell Doom for U.S. Dollar

Release Date: 
Friday, September 30, 2016

Gold prices rose on Friday but ended the week in negative territory as investors digested a mix bag of economic news including the growing concern over Deutsche Bank’s solvency.

“Gold futures prices firmed Friday, aiming for back-to-back session gains and limiting losses for the week, as global market jitters sparked by German financial giant Deutsche Bank boosted the haven appeal of the precious metal.

“Considering how much media attention this topic has attracted over the past few days, we consider it likely that this risk-off environment continues for a while, as investors re-price the rising probability of a banking crisis in the eurozone, or even another large-scale economic crisis,” said Charalambos Pissouros, senior analyst at IronFX Global, in a note…

“Shares of Deutsche Bank traded briefly under 10 euros, their lowest level on record, as global markets got their first chance to react to reports that some of Deutsche Bank’s biggest clients have been pulling out funds.

“The bank, run by CEO John Cryan, has seen its cost of borrowing climb amid questions about its ability to pay a potential $14 billion fine from the U.S. Justice Department. That prompted a deepening debate about whether the government should step in to help the bank or risk deeper financial market ripples.

“’Nothing is set in stone and it is clear that the German government cannot afford to let Deutsche bank fail,’ said Julian Phillips of Goldforecaster.com, in his daily update. ‘The ‘ripple’ effect would be horrendous on the developed world in its entirety. But the markets are rattled when they see hedge funds leave the bank….’” (“Gold draws ‘hideout’ demand as Deutsche Bank rattles markets anew,” MarketWatch, 9/30/16.)

Gold ended the week down $21.20, closing at $1,316.90. Silver prices closed at $19.25, down $0.53.

Rise of Chinese Currency May Spell Doom for U.S. Dollar
Market analyst Kira Brecht discussed the potentially devastating impact of the IMF’s decision to add the Chinese currency to its elite basket of reserve currencies in the Special Drawing Rights (SDR).

“Move over world currencies. China's currency – the renminbi is taking its spot at the table. On Oct. 1, the International Monetary Fund will add the renminbi, to its elite basket of reserve currencies in the Special Drawing Rights (SDR).

“This is “a momentous event” for the international finance community says Cornell University economist Eswar Prasad… Many gold traders are well aware of the ‘doom and gloom’ scenarios that become fashionable from time to time regarding the demise and collapse of the U.S. dollar and the havoc that could potentially wreck on global financial markets. What has propped up the dollar in recent years has been a lack of any strong alternative reserve currency…

“The renminbi’s rise to the status of a global reserve currency is ‘happening before our eyes,’ Prasad added.  ‘Many central banks around the world – 34 at last count – have signed local currency swap lines with the People’s Bank of China, which means they have access to renminbi should they need it,’ Prasad says.

“But, there are still concerns. ‘In order for the renminbi to be considered a safe place for investors to put their money in times of turmoil, foreign investors and domestic investors in China must have trust in China, Prasad says. ‘And that is missing…’

“History shows that reserve currencies come and go… The bottom line: the U.S. is running a highly leveraged economy and if higher interest rates were seen amid slowing foreign debt purchases in the future, things could get ugly for American consumers.

“Gold continues to be a good insurance policy and a portfolio diversifier. More and more asset managers are bumping up their asset allocation levels to gold, some as high as 30%. What's in your portfolio right now?” (“The Chinese Yuan: Does October 1 Spell Doom For the U.S. Dollar?” Kitco, 9/23/16.)

NOTE: Goldline believes that precious metals are appropriate for 5% to 20% of an investment portfolio.

Saudi Arabia Threatens U.S. Over 9/11 Legislation
Congress voted to override a presidential veto and allow the victims of the 9/11 terrorist attack to sue Saudi Arabia for its alleged involvement (fifteen of the 9/11 terrorists were Saudi nationals). The legislation sparked threats of “disastrous consequences” from the Saudi kingdom.

“Saudi Arabia on Thursday warned of "disastrous consequences" from a United States law allowing 9/11 victims to sue the kingdom, in a major spike in tension between the longstanding allies.

“The warning came after the US Congress voted overwhelmingly on Wednesday to override President Barack Obama's veto of the Justice Against Sponsors of Terrorism Act (JASTA) on relations between states. JASTA allows attack survivors and relatives of terrorism victims to pursue cases against foreign governments in US federal court and to demand compensation if such governments are proven to bear some responsibility for attacks on US soil.

“A Saudi foreign ministry source on Thursday called on the US Congress ‘to take the necessary measures to counter the disastrous and dangerous consequences’ of the law… Analysts earlier Thursday warned that Saudi Arabia could reduce valuable security and intelligence cooperation with longstanding ally Washington after the Congressional "stab in the back."

Cutting such cooperation is among the options available to Riyadh, the analysts said. ‘I'm afraid that this bill will have dire strategic implications’ for the United States, Salman al-Ansari, head of the Saudi American Public Relation Affairs Committee (SAPRAC), told AFP… Saudi Arabia was home to 15 of the 19 Al-Qaeda hijackers who carried out the September 11, 2001 attacks on the United States which killed nearly 3,000 people.
Riyadh denies any ties to the plotters…

“Mustafa Alani, a senior adviser to the Gulf Research Center, suggested a review of the Saudi-US alliance. ‘Your financial investments have to be reduced in the US, your political and security cooperation has to be reduced,’ he said.

“A senior Saudi prince reportedly threatened to pull out billions of dollars of US assets if JASTA became law, though Saudi officials have distanced themselves from such threats. ‘It will be very difficult for Saudi Arabia to continue in intelligence cooperation when they take such a hostile position,’ said Jamal Khashoggi, a veteran Saudi journalist and analyst. He said Saudi officials are probably debating whether to act now or ‘wait until the first suit is filed in some small town in America.’ (“Saudi Warns Of 'Disastrous Consequences' Over US 9/11 Law,” NDTV, 9/30/16.)

Global Economy Moves Closer to Implosion – Embry
John Embry, Senior Investment Strategist at Sprott Asset Management, told King World News that “epic” debt is leading the world economy to implosion.

“[A]s I watch the unfolding economic and financial saga unfolding globally, I’m reminded of the famous quote from Hemingway’s The Sun Also Rises.  When asked, how did you go bankrupt?  One of the protagonists responded: ‘gradually, then suddenly…’

“And I think that remark is particularly appropriate for what is currently happening today on the global financial scene.  There are major issues everywhere, with the disasters today being the desperate state of Deutsche Bank in Germany and the downgrade of Turkish debt to junk.  However, these are just two issues and there are equally pressing problems around the globe…

“So we are inexorably moving from ‘gradually’ to ‘suddenly,’ with respect to a global implosion.  The root of the problem is actually easily identifiable.  The entire world went on an epic debt binge over the past 30+ years and now the bill is coming due.  Anybody who has any rudimentary understanding of Austrian economics could have predicted this terminal state of affairs years ago…
“At the same time, there is an ongoing attempt to bury the price of gold and silver in the paper markets.  But up to now gold has proven to be particularly resilient.  With each passing day we are one day closer to the upward explosion in the price of both metals.  Investors are being given a wonderful opportunity to buy the physical metals...  In view of the gross overvaluation of virtual all financial assets in the world, diversification into gold and silver is absolutely essential at this time.’” (“John Embry Warns Global Implosion Edges Closer,” KWN, 9/27/16.)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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