Has China Begun to Issue a Gold-Backed Renminbi?

Has China Begun to Issue a Gold-Backed Renminbi?

Where’s the Economic Growth We Were Promised?

by Chuck Butler, President, EverBankChuck Butler EverBank

Have you ever wondered, at least recently, if the markets are just playing games with investors? It’s like a game of good cop, bad cop… On one day, the markets will be all about the euro (EUR), and the prospects for a solution to the Eurozone debt problems, and without any notice, turn on the euro, for a different reason. I’ve always said that traders were fickle, but this is taking it to the extreme, and beginning to cause me to have a rash!

For instance, yesterday morning, the markets were full of euphoria regarding the size and shape of the European Financial Stability Fund (EFSF), and rewarded the euro by pushing it above 1.38… Then a couple of hours later, the euro began to slide, and now it was because traders and participants became nervous about the European leaders bickering over a plan to contain the Eurozone’s debt crisis…

You don’t know whether to hug the euro, or kick it in the rear! But I can tell you this… I truly believe that we are going to see this volatility in the euro remain for some time to come… Investors and traders want to punish the dollar for zero interest rates, exploding debt, and the inability of lawmakers to deal with the debt the right way. But then the offset to the dollar is the euro, and they have exploding debt too, but at least their leaders are attempting to address how to deal with it, and have implemented many austerity measures already. So… The volatility will continue, because… There’s no clear direction… Not yet… But if one should surface, we could put all this volatility in our rear view mirrors.

So… The euro is trading around 1.3770 this morning… Not 1.38, but also not 1.31! I don’t think traders want to go out on a limb this morning, with the Eurozone Crisis Meetings happening this weekend… Remember, on Monday, I told you that Eurozone leaders pledged to have a solution on October 23rd… So… The Eurozone leaders will have some meaningful meetings this weekend, leaving a ton of sawdust on the floor, and hopefully they can stop the bickering, and come up with a solution… It’s not just a Eurozone problem, folks… If the Eurozone falters they will bring the rest of the world along for the ride… Yes, even the US, because there is so much in common between the two “countries”…

Come Monday I wouldn’t be surprised to wake up to calls from the Eurozone leaders saying that they need more time to iron out the details of their plan… If that happens, I would think that the euro would get punished, for the euro was rewarded when the Eurozone leaders pledged that they would have a plan come Monday…

The Swiss franc (CHF) is back on the rally tracks this morning, pushing the envelope with franc strength to $1.12… People are still convinced that owning Swiss francs is the way to offset euro and dollar weakness, and they may very well be right… But I’m still concerned with Swiss francs for a number of reasons… Like: The country and the issuance of francs is small compared to dollars, euros, yen (JPY) and pounds (GBP). The reason that people flock to francs is that they believe the franc is backed by gold… And that’s an urban legend. And then we have the Swiss National Bank (SNB) intervening… Just not the recipe for stability that I look for, here…

Rather… I look to the Asian countries, like China and Singapore for that stability… Not that they can’t lose value, but they aren’t as volatile, and they do have something behind them… I’ve long said that everyone should own some renminbi (CNY) in their currency account, for I truly believe that eventually the Chinese will achieve wide distribution of their currency, float it, and look to take over the reserve currency of the world…

I’ve told you here, and whenever I speak, that the Chinese have been hoarding gold… Huge chunks of gold over the past few years… And I thought, and this is long before the rest of the pundits out there came up with idea (although, they really didn’t come up with it, they simply read it in the Pfennig)… I thought that the Chinese were buying up gold to back the renminbi with gold someday… Talk about making your currency attractive overnight! WOW! Maybe not 100% backed with gold, but some percentage backed by gold is what I’ve said for a couple of years now.

And then I saw this on the Casey Research site…

This week the Chinese Gold & Silver Exchange Society (CGSE) — a bullion exchange based in Hong Kong — started trading gold quoted in Chinese yuan. The contract, called Renminbi Kilobar Gold, is promoted as offering investors a “double safe haven” — exposure to both gold and an appreciating currency. This line of thought nicely accompanies China’s intention to boost the yuan’s international appeal. It is expected that this product will attract retail and institutional investors alike from both the Chinese mainland and overseas.

Whether or not the yuan can deliver its part of the “double safe haven plan,” Renminbi Kilobar Gold trading in the first day was strong, with 322 traded gold contracts totaling 112 million yuan (or US$17.5 million). The settlement price ended up at 346.95 yuan per gram, or $1,693.9 an ounce.

Just a quick reminder that yuan and renminbi are one in the same, like the dollar and buck, or green/peachback…

I love it when a plan comes together! And apparently this is the start of what I saw was going to happen! WOW! Hey, even a blind squirrel can find an acorn!

And yes, owning renminbi isn’t sexy… It moves at a snail’s pace… It’s like watching paint dry… But think about this for a minute… Since July of 2005, the renminbi has gained about 25%… (And remained steady during the financial meltdown)… That’s 25% of purchasing power you lost in holding dollars during that time that could have been made up by owning renminbi!

When I give presentations, people say, “Hey Chuck, I hear what you’re saying about renminbi, but how can I own it if the currency can’t be taken out of China?” Ahhh grasshopper… If you’re adventurous you can go to Hong Kong, open an account and hold renminbi… Or, if you’re not into international travel, but are willing to go to New York City, the Bank of China office in NYC allows you to buy and hold renminbi, but there’s a limit to the amount you can buy per year… Or… If you want a quick and simple way to own renminbi, you can hold renminbi in a deposit account at EverBank World Markets… The renminbi deposit account does not pay interest, but you do receive any appreciation or depreciation the renminbi experiences.

That public service announcement was brought to you by me!

Ding, dong, the witch is dead… That’s what I keep thinking every time the TV reports on the former dictator of Libya… I’m also of the opinion that if he was killed, it was by his own people, and not us, which works out better…

Gold suffered through another day of selling yesterday. The central banks of the world, except those in Asia, and in Russia, are scared to death that gold is going to replace the dollar, and they can’t have that happen! Circuit breakers… But gold looks like it has caught a bid this morning, but the buying is weak, and could be turned around in a heartbeat.

OK… It looks like the second half of the year rebound that the Fed kept telling us that was coming, isn’t coming… Even the Fed Heads are beginning to talk about how they will deal with continuing weakness in the economy… Eric Rosengren, Boston Fed Reserve President said, “The Federal Reserve should restart purchases of mortgage backed securities to boost the US economic recovery.” And St. Louis Fed President, James Bullard said, “A third round of quantitative easing is still on the table”…

Of course, if the Fed Heads had just read the Pfennig they would know that they are going to implement another round of quantitative easing (QE) and they could just skip to the chase! So, like the two old ladies in the old commercial… “Where’s the beef?”… Where’s the economic growth we were promised?

And then this story headline flashed across the screen yesterday, but I was unable to find any back up to the story… Get this… “US Fed Chairman Bernanke to submit proposals next week to congress to help housing market.”

OK… I’m going to stop on that thought right there, before I get myself in trouble! But being the astute readers you all are, you can complete that thought on your own…

Yesterday’s data here in the US was mixed, with Weekly Initial Jobless Claims remaining above 400,000 at 403,000. The Bloomberg Consumer Comfort index fell from -50.8 to -48.4… And Leading Indicators were positive, as was the Philly Fed Index, and Existing Home Sales fell 3% versus August. All-in-all nothing to back up the Fed’s claim that the economy would rebound in the second half of this year.

The data cupboard is completely empty today… So, the markets will have to find something else to trade off of.

Then there was this… From the McClatchy Washington Bureau…

Citigroup agreed to pay $285 million to end a Securities & Exchange Commission case related to a $1 billion offshore collateralized debt obligation. The SEC said Citigroup gave deceptive information to investors, then bet against its customers…

Hmmm… OK… Who gets the $285 million? Shouldn’t it go to the investors that got deceptive information?

To recap… Another up and down day for the currencies. The volatility in the currencies, led by the euro will continue until a concrete plan to deal with the Eurozone debt is in place. Gold suffered through another day of selling yesterday, but seems to have caught a bid this morning, although a weak bid. And has China begun to issue a gold-backed renminbi? Uh-oh!

Chuck Butler
for The Daily Reckoning

Where’s the Economic Growth We Were Promised? originally appeared in the Daily Reckoning. The Daily Reckoning provides over 400,000 readers economic news, market analysis, and contrarian investment ideas.

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter. With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News and World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune. Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

For additional information visit EverBank

About Author

Brett

Hi, I’m Brett Owens – and I’m a financial junkie. My “problem” started incollege, when I got a little dose of the stock market – man, was I hooked…in no time, I was reading the Wall Street Journal religously.

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