China Revaluation News Could Spark Short Term Squeeze in Metals

News that China is open to revaluing its currency could bring about a short term reduction in the price of precious metals. Ahead of important multi-national conversations about the future of global trade and the world economy, China politicized its monetary policy, hoping to push back criticism that it is a global currency manipulator. Earning the title of a currency manipulator could open an easy door for global political leaders to push tariffs on Chinese manufactured goods, allowing for a trade war that would be most destructive to international economic growth, particularly in China.

Why it Matters

First and foremost, China is one of the largest exporters in the world, producing everything for nearly every country and bringing in hundred billion dollar annual trade surpluses in the process. Since China is such an integral part to physical trade, the value of its currency is something that is universally important.

Despite alleging that it does not manipulate the value of its currency by pegging it to the price of the US dollar, the markets disagree. The CNY has appreciated against the Euro at a pace nearly ten times faster than it has appreciated against the US dollar – all while claiming that the US dollar and the Euro are both “heavily weighted” in its basket of currencies it prices against its native currency.

The Dollar and Metals

As you’re well aware, precious metals trade inversely to the US dollar and are seen as a way to diversify out of cash and into hard assets. Therefore, when the Chinese go to revalue their currency for the third time in just over three years, the dollar will earn a very short term appreciation against the Chinese Renminbi (yuan), and gold and silver should reciprocate with a slight decline. This decline will be only temporary, and it may instead be nothing more than a pause in appreciation, as China’s Renminbi will not freely float, but instead give the dollar only a minor leg up in its pricing against the Renminbi.

The Future for Metals

Nothing short of a proper freely floating currency will have any impact on global trade. If the Renminbi were allowed to freely float, the price would appreciate quickly, as China is supported by a strong trade surplus, stable government, and a stockpile of foreign cash reserves.

After a price revision, it would be expected that US imports of Chinese made goods would drop as they become more expensive, the US trade imbalance might heal, and the rate at which the Federal Reserve has to inflate the currency to keep up with an exponentially growing debt might slow. However, in the real world, it is highly unlikely we’ll ever see a freely floating Renminbi, and the United States will continue to import far more than it can ever export. A negative balance of trade, of course, is the best thing that could ever happen to inflation resistant metals like gold and silver.

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Tags: Chinese Renminbi, currency manipulator, Gold and Silver, Monetary policy, precious metals