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Yikes! The WSM nearly shakes the WEM from his TOADP…

FROM BLOOMBERG we get the bad news that “Bank of England Governor Mervyn King said inflation is likely to exceed the UK government’s upper 3% limit in coming months as higher sales taxes drive gains in consumer prices,” reports the Mogambo Guru in Tampa, Florida for The Daily Reckoning.

UK prices “rose 3.1% in July from a year earlier after climbing 3.2% in June.”

Apparently, Dr.King has to write a letter about it, probably something along the lines of:

“Dear British taxpayer,

“Our stupidity and incompetence have caused prices to rise more than 3% in a year, which means you are all doomed unless we government lowlife halfwits stop being incompetent, especially as regards monetary policy in general and creating far too much new money in particular, which we won’t. Terribly sorry, old chap.

“Respectfully yours,

“Mervyn.”

Of course, this cruel punishment of having to write a letter is harsher than the justice meted out in the USA, as New Jersey, and everybody connected with their pension disgrace, lied, hid relevant information and data, and is, according to the SEC, being charged with the fraud and corruptions of “withholding and misrepresenting pertinent information about its financial situation” so that municipal bond sales could continue.

Actually, in the UK, their consumer price index (CPI) rose at an annual rate of a scary 3.1% in July, which was only down from a slightly-scarier 3.2% rise in prices in June.

And inflation in something called the retail price index (RPI) came in at a terrifying 4.8% annual rate of increase! Yikes!

Here in the USA, according to The New York Post reporting a “recent JPMorgan Chase study” of prices at Wal-Mart showed that “the world’s largest retailer has raised prices by nearly 6% on average over the past six weeks,” and, “Prices on certain items increased by more than half,” which is an instant inflation rate of 50%, which all thinking people agree is a lot of inflation! Wow!

Now, if you are like me, then you are already calling for rough vigilante justice and/or some mindless, merciless mob rule, an obviously hysterical over-reaction when compared to saner heads saying to simply let the justice system take care of these government and Federal Reserve creeps, and they will all be found guilty and locked away in a dark and dank dungeon for the rest of their lives, and you can go to the prison on visiting day and laugh at them and make fun of them right to their snotty faces, and tell them how much you enjoy seeing them slowly rotting in prison as punishment for having caused so much suffering and misery with their greedy, self-serving arrogant treachery.

So, we all finally agreed that they would let me up from being pinned rudely to the ground if I agreed not to advocate open revolution, rebellion of any kind, mob rule, vigilante justice, or have anything to do with any extra-legal “rounding up” of any, or all, of these malfeasant monsters for any punishment, well-deserved or not.

They, in turn, were required to stipulate that this Whole Stinking Mess (WSM) was proof of how justified I was in having so little faith in a lying, moronic, rat’s nest of incestuous government thievery and lying.

So, what happened to these lying, thieving Jersey scumbags who ripped us off? According to Ian Mathias, in his essay “Another Warning Shot for Bond Investors” here at The Daily Reckoning, “the penalty for this outright fraud” is “Nothing.”

In fact:

“The State of New Jersey will pay the SEC precisely zero dollars. Not one state employee will pay a fine either, or go to jail…not even lose his job. In fact, the State didn’t even have to admit wrongdoing. ‘New Jersey agreed to settle the case without admitting or denying the SEC’s findings,’ calmly explains the SEC press release.”

About this time my fists clenched into Mogambo Fists Of Rage And Outrage (MFORAO), and I am screaming obscenities at them, and curses upon them, and exhorting the excitable gathering crowd to do the same and then converge on Washington, DC to take over the US government in some spontaneous revolutionary rebellion, whereupon everybody agrees to place me, The Fabulous Mogambo (TFM), on the Throne Of Absolute Dictatorial Power (TOADP), and thus begin the wonderful reign of the Fabulous Emperor Mogambo (FEM)!

This is where I bring back gold and Silver Bullion as the currency of the United States to fix the dollar’s value to the only tangible things that have survived 4,500 continuous years of history, explaining their required use as money as written in the Constitution of the United States, and I will be a true American hero, and everyone will love me and proudly name their children Mogambo, a proud name meaning, “The wise and handsome one, and hung like a horse” instead of meaning, you know, other stuff not as complimentary.

After doing that, I would probably have lunch, and maybe a nice nap. Then, when I got up, I would eliminate, at a stroke, all barriers to real entrepreneurial free-market capitalism that don’t address actual criminal frauds and corruptions, setting us on the road, at last, to Utopia.

The closest I can come to providing a parallel is in the movie It’s a Wonderful Life when Jimmy Stewart returns to Bedford Falls after Clarence the Angel gives him his wish to have “never been born.” Jimmy discovers that the town has turned into Pottersville, where the previously sedate downtown area is now a hoppin’ and boppin’, be-boppin’ thriving community, where one finds blaring marquees advertising “Girls Girls! Girls!”, all in a fun-loving, laughing, whirling, jazz-crazed, alcohol-fueled boomtown extravaganza of “party down, dudes and dudettes!”

I will not get into criticizing Jimmy Stewart when he finds out he is not married anymore, since he had never been born, and he gets weird about it (“Mary! Mary!”), instead of saying “Yippee!” and happily heading back to the party, hopefully to run into Violet, and I will stick, instead, strictly to economics.

From a research standpoint, I had been hoping that there was something in the official records of Pottersville that would indicate the conditions of the local economy under the wise stewardship of Mr. Potter lending money for capital equipment to satisfy real demand, instead of the previously lackluster economy of crumbling Bedford Falls, where the Savings and Loan was apparently so broke that they had all Sam’s money in Joe’s house, and Sam said to Joe, “What are you doing with my money in your house, you moron?” and Joe said, “Who you calling a moron, you ugly little snot?” and there was a big fight, all of which was later completely edited out of the movie, which explains why not many people know about this ugly part of the story.

The point is that the people affected by my wholesale slicing of the government payrolls and paring of the list of Pottersville government parasites would be employed as new-hires by new private businesses, new industries springing up as solid, demand-led growth, and hired as part of a brave new economic tomorrow of zero inflation, higher quality goods and services with lower prices, thus raising the standard of living for everyone, which is the gift of the free market. Whee!

Well, it turns out that official records of Pottersville are, mysteriously, missing, and there is constant denial at all levels of government, where most of their “official government policy” is summarized as, “It was only a movie, you nitwit! They made it all up! There is no Pottersville, and there never was! What in the hell is wrong with you that you keep calling us up and asking this stupid question all the time?”

So, it looks like the truth will never be known, so my advice is to keep buying gold, silver and oil until it all gets sorted out, one way or the other. By that I mean, of course, that one way is to end badly, and the other way is to end very badly.

Except if you are buying gold, silver and oil today, because then it will all end happily for you, and you will say to your son Mogambo Junior, “Whee! That investing stuff was easy.

Buy Gold and silver at BullionVault today…

Source:A Whole Stinkin' Mess

Yikes! The WSM nearly shakes the WEM from his TOADP…

FROM BLOOMBERG we get the bad news that “Bank of England Governor Mervyn King said inflation is likely to exceed the UK government’s upper 3% limit in coming months as higher sales taxes drive gains in consumer prices,” reports the Mogambo Guru in Tampa, Florida for The Daily Reckoning.

UK prices “rose 3.1% in July from a year earlier after climbing 3.2% in June.”

Apparently, Dr.King has to write a letter about it, probably something along the lines of:

“Dear British taxpayer,

“Our stupidity and incompetence have caused prices to rise more than 3% in a year, which means you are all doomed unless we government lowlife halfwits stop being incompetent, especially as regards monetary policy in general and creating far too much new money in particular, which we won’t. Terribly sorry, old chap.

“Respectfully yours,

“Mervyn.”

Of course, this cruel punishment of having to write a letter is harsher than the justice meted out in the USA, as New Jersey, and everybody connected with their pension disgrace, lied, hid relevant information and data, and is, according to the SEC, being charged with the fraud and corruptions of “withholding and misrepresenting pertinent information about its financial situation” so that municipal bond sales could continue.

Actually, in the UK, their consumer price index (CPI) rose at an annual rate of a scary 3.1% in July, which was only down from a slightly-scarier 3.2% rise in prices in June.

And inflation in something called the retail price index (RPI) came in at a terrifying 4.8% annual rate of increase! Yikes!

Here in the USA, according to The New York Post reporting a “recent JPMorgan Chase study” of prices at Wal-Mart showed that “the world’s largest retailer has raised prices by nearly 6% on average over the past six weeks,” and, “Prices on certain items increased by more than half,” which is an instant inflation rate of 50%, which all thinking people agree is a lot of inflation! Wow!

Now, if you are like me, then you are already calling for rough vigilante justice and/or some mindless, merciless mob rule, an obviously hysterical over-reaction when compared to saner heads saying to simply let the justice system take care of these government and Federal Reserve creeps, and they will all be found guilty and locked away in a dark and dank dungeon for the rest of their lives, and you can go to the prison on visiting day and laugh at them and make fun of them right to their snotty faces, and tell them how much you enjoy seeing them slowly rotting in prison as punishment for having caused so much suffering and misery with their greedy, self-serving arrogant treachery.

So, we all finally agreed that they would let me up from being pinned rudely to the ground if I agreed not to advocate open revolution, rebellion of any kind, mob rule, vigilante justice, or have anything to do with any extra-legal “rounding up” of any, or all, of these malfeasant monsters for any punishment, well-deserved or not.

They, in turn, were required to stipulate that this Whole Stinking Mess (WSM) was proof of how justified I was in having so little faith in a lying, moronic, rat’s nest of incestuous government thievery and lying.

So, what happened to these lying, thieving Jersey scumbags who ripped us off? According to Ian Mathias, in his essay “Another Warning Shot for Bond Investors” here at The Daily Reckoning, “the penalty for this outright fraud” is “Nothing.”

In fact:

“The State of New Jersey will pay the SEC precisely zero dollars. Not one state employee will pay a fine either, or go to jail…not even lose his job. In fact, the State didn’t even have to admit wrongdoing. ‘New Jersey agreed to settle the case without admitting or denying the SEC’s findings,’ calmly explains the SEC press release.”

About this time my fists clenched into Mogambo Fists Of Rage And Outrage (MFORAO), and I am screaming obscenities at them, and curses upon them, and exhorting the excitable gathering crowd to do the same and then converge on Washington, DC to take over the US government in some spontaneous revolutionary rebellion, whereupon everybody agrees to place me, The Fabulous Mogambo (TFM), on the Throne Of Absolute Dictatorial Power (TOADP), and thus begin the wonderful reign of the Fabulous Emperor Mogambo (FEM)!

This is where I bring back gold and Silver Bullion as the currency of the United States to fix the dollar’s value to the only tangible things that have survived 4,500 continuous years of history, explaining their required use as money as written in the Constitution of the United States, and I will be a true American hero, and everyone will love me and proudly name their children Mogambo, a proud name meaning, “The wise and handsome one, and hung like a horse” instead of meaning, you know, other stuff not as complimentary.

After doing that, I would probably have lunch, and maybe a nice nap. Then, when I got up, I would eliminate, at a stroke, all barriers to real entrepreneurial free-market capitalism that don’t address actual criminal frauds and corruptions, setting us on the road, at last, to Utopia.

The closest I can come to providing a parallel is in the movie It’s a Wonderful Life when Jimmy Stewart returns to Bedford Falls after Clarence the Angel gives him his wish to have “never been born.” Jimmy discovers that the town has turned into Pottersville, where the previously sedate downtown area is now a hoppin’ and boppin’, be-boppin’ thriving community, where one finds blaring marquees advertising “Girls Girls! Girls!”, all in a fun-loving, laughing, whirling, jazz-crazed, alcohol-fueled boomtown extravaganza of “party down, dudes and dudettes!”

I will not get into criticizing Jimmy Stewart when he finds out he is not married anymore, since he had never been born, and he gets weird about it (“Mary! Mary!”), instead of saying “Yippee!” and happily heading back to the party, hopefully to run into Violet, and I will stick, instead, strictly to economics.

From a research standpoint, I had been hoping that there was something in the official records of Pottersville that would indicate the conditions of the local economy under the wise stewardship of Mr. Potter lending money for capital equipment to satisfy real demand, instead of the previously lackluster economy of crumbling Bedford Falls, where the Savings and Loan was apparently so broke that they had all Sam’s money in Joe’s house, and Sam said to Joe, “What are you doing with my money in your house, you moron?” and Joe said, “Who you calling a moron, you ugly little snot?” and there was a big fight, all of which was later completely edited out of the movie, which explains why not many people know about this ugly part of the story.

The point is that the people affected by my wholesale slicing of the government payrolls and paring of the list of Pottersville government parasites would be employed as new-hires by new private businesses, new industries springing up as solid, demand-led growth, and hired as part of a brave new economic tomorrow of zero inflation, higher quality goods and services with lower prices, thus raising the standard of living for everyone, which is the gift of the free market. Whee!

Well, it turns out that official records of Pottersville are, mysteriously, missing, and there is constant denial at all levels of government, where most of their “official government policy” is summarized as, “It was only a movie, you nitwit! They made it all up! There is no Pottersville, and there never was! What in the hell is wrong with you that you keep calling us up and asking this stupid question all the time?”

So, it looks like the truth will never be known, so my advice is to keep buying gold, silver and oil until it all gets sorted out, one way or the other. By that I mean, of course, that one way is to end badly, and the other way is to end very badly.

Except if you are buying gold, silver and oil today, because then it will all end happily for you, and you will say to your son Mogambo Junior, “Whee! That investing stuff was easy.

Buy Gold and silver at BullionVault today…

Source:A Whole Stinkin' Mess

US dominance is under threat from more than just China’s foreign-reserves hoard…

CHINA is the largest holder of the US Dollar in its foreign exchange reserves, notes Julian Phillips at the GoldForecaster.

But Beijing’s $2.45 trillion in US assets is an impossible number to trade on foreign exchanges. So they’re stuck with them, until they can spend them. As long as the US Dollar is the world’s sole reserve currency, these reserves are useful to buy any asset in any country. But it is vital that they retain their buying power.

Buying power is defined by its exchange rate value, and inside the United States relates to the inflation rate. A prime task of the Federal Reserve is to maintain price stability, i.e. buying power stability. So when China expressed concern over the value of the Dollar (and its buying power), we all became concerned. There are many reasons to be concerned about the future of the Dollar. We shall look at some of these in this article.

Quantitative Easing is a technique the Fed used to fill the holes that the credit crisis created. Writing down of assets is essentially a reduction of money in the system. The consequences of this in the banking system meant that money disappeared off bank balance sheets and reduced their lending capabilities. The actions of the Fed allowed the money that disappeared to reappear again. It works nicely if the banks keep on lending. But if they don’t the exercise is fruitless as they protect themselves by not lending, but investing back in government bonds instead.

That’s happening today, because instead of lending money, banks are investing in Treasury and Agency securities. Their holdings of such assets increased to $1.57 trillion at the end of July, up 40% from $1.12 trillion in mid-2008. The government is borrowing in a rush, to shore up its deficit, growing fast at the moment. The projected 2010 deficit of $1.47 trillion will be a record, and equivalent to 10% of the economy. China and most other people expect such a growing deficit will lead to a significantly weaker Dollar.

At worst, such a prospect has the potential to deter foreign investment in the US, shoving up interest rates. If the US Dollar Index falls below 80 (this Index measures the Dollar against a basket consisting of the Euro, Yen, the Pound Sterling, the Canadian Dollar, the Swedish Krona and Swiss Franc), the Dollar will fall quickly and heavily and further discourage investment in Dollar assets.

The longer the government delays in stimulating the US economy again, the bigger the amount of new money needed to reflate the economy. As an economy deflates, money velocity slows and consumer attitudes become more and more thrifty. This makes efforts to return the economy to growth harder and harder. A fair analogy would be to compare the situation to retrenching an employee. To bring confidence and hope back to previous levels, two employees must be hired. The longer it takes to fire up the economy, the greater the stimuli needed to do so. Experienced investors are expecting new stimuli to lead to explosive inflation because the change from deflation to recovery becomes more and more mercurially uncontrollable the longer it is delayed.

We do not expect to see a US trade surplus in the years to come, because of the structure of the US economy. Every deficit means that more Dollars were exported. To date the difference between a recessionary economy and a growing economy is either a $30 billion or a $60 billion trade deficit.

However, we do not think that US foreign suppliers will dump their Dollars, but we do expect them to accept only the amounts that relate directly to the value of their US trade in the future. Lowering the amount of Dollars they accept will allow them to reduce its role as the sole reserve currency over time.

Unless the US restructures its economy so that the trade deficit is eliminated, there is an immeasurable (but certain) time limit on its continuing as the sole reserve currency. As the power of the US wanes, the clock is ticking. There are two events that will precipitate this hasty decline. Each of these has the power to accelerate the role of the Dollar in the global economy.

Since Middle Eastern oil production began sales of oil have been priced in the Dollar. While there has been discussion on Dollar pricing, no change has been made to it. The Middle Eastern nations cannot afford to stand alone, they believe. The US has guaranteed their security and shown that they are committed to doing this as seen in Kuwait and in Iraq. Such commitment now protects these nations from terror attacks as well. The House of Saud would fall quickly were it not for the protection they get from the US.

Hence there is more to pricing oil in the US Dollar than meets the eye. Until this advantage is either lost or replaced there is little enthusiasm to accept other currencies in payment of oil. Of late, though, we have seen Saudi Arabia increase its gold reserves and expect the rest of the Persian Gulf nations to follow suit, in time. We see this as them buying a small amount of insurance against the dangers facing the US Dollar.

You may well ask why haven’t they diversified their reserves into other currencies? Just as the Dollar is a reserve currency because of its ‘oil backing’, so oil in itself is instant international liquidity acting the same way as gold does. The need to have diversified reserves is lessened because of this. Consequently the dangers facing oil producers are not nearly as great as those who will have to rely on their gold and foreign currency reserves should they face a crisis. Gold buying by them is not for the benefit of the country, but for the sake of the reserves themselves.

China is up and coming and draining the power and wealth from the West. It is inevitable that a growing world won’t rely on a waning Dollar, but will set up a system that immunizes them from the ailments of the Dollar. We believe discussions are well under way to globally use a basket of the world’s main currencies as the benchmark for global trade. After all, the focus of US Dollar policy makers is on US economic performance, not on global economic performance.

A global reserve currency must reflect the overall global economy’s state not just one part. It must also have the flexibility to reflect changes in the performance of different parts of the global economy. The ‘basket’ idea suits this role well.

Finally, there’s the looming internationalization of the Chinese Yuan. While the Chinese banking system is not yet mature enough to be a large part of the global banking community, they are moving fast to get there. At the moment the heart of Chinese manufacturing (the Guanchou area) is allowed to use the Yuan internationally. It’s a bit like a movie maker trying out the popularity of a film in one town. Once they have systems that are tried and tested they will be able to go global.

The advantages of pricing Chinese goods in the US Dollar are huge, still. It’s a currency used all over the world and by managing the exchange rate, the Chinese export industry remains competitive internationally. In the process China gains a huge level of surplus Dollars needed for its development in future years. So long as the Dollar retains its buying power internationally this position is fine. But it is clear to all that the US Dollar may well not be able to retain its buying power at the current level in the not so far future. The day is already on the horizon when it would serve China well to gather the currencies of all its trading partners in its reserves rather than just the two main ones.

It will also serve the Chinese to have the Yuan become an international reserve currency, under their own management. Even as part of a global basket of currencies the advantages to China would become greater than they are in using the Dollar, particularly if they could buy oil in the Yuan too. The transition to an international Yuan would hurt the Dollar, but such pain may serve China better in the long run. After all if the Dollar did plummet, China would simply be another victim. We do not see them letting that happen and will act to forestall that. Even the Chinese see gold playing a part in the transition and beyond.

Buy Gold at the very lowest costs possible using world No.1 BullionVault…

Source:Buying Power in Dollars

Will the real inflation rate please stand up…?

DOES POWER come from being rich and prosperous? asks Dan Denning in his Daily Reckoning Australia.

Or do you get rich and prosperous by being hard working and frugal? Perhaps power comes from living beneath your means…?

We take up the question because in China – now the world’s largest energy consumer according to the International Energy Agency – most of the power comes from coal (about 65%). The rest comes from a combination of renewables, geothermal, nuclear, gas, oil and hyrdo-electricity. When you’re the world’s largest consumer of energy, every little bit helps.

But how about a look in pictures to literally change your perspective? The chart below shows the world in terms of nuclear energy generated for domestic electricity consumption. On this map, which is based on 2005 figures, you can see that Australia is a virtual non-entity, dwarfed even by New Caledonia…the yellow blob of French origin to the right of the map.

The map, courtesy of www.worldmapper.org, shows what proportion of total global electricity production from nuclear occurs in each country…

You could argue that Australia is under-represented here, because its share of total electricity production from nuclear is very small in the global context. And in that, you would be at least partially right. Australia’s share of total production is so small because it doesn’t produce any electricity from nuclear and apparently has no plans too.

Aside from the public policy short-sightedness of this – especially if you believe that coal is killing the planet – what’s the investment story? There are energy exporters in Australia who can profit from China’s new energy pre-eminence. Among them are the coal companies (BHP, Rio, Centennial Coal, Whitehaven), the gas companies, the oil companies, the LNG companies, and the uranium companies.

If a single, over-priced, energy-efficient, short-lived florescent globe is never lit by electricity from nuclear power in Australia, we reckon you could still make money from the global growth of nuclear. That’s the subject we’ve taken up in the July issue of Australian Wealth Gameplan. And it’s why today’s notes will be brief. We’re going to try to meet a deadline for once.

But first, there’s a puzzle to solve. Today’s papers are full of stories on how the Reserve Bank of Australia will have to raise interest rates when it meets August 3rd, just 18 days before the Federal Election. The notes from the recent RBA meeting revealed two nuggets of interest.

First, the RBA expects inflation to rise. Putting aside the fact that it would know this already since it’s responsible for inflation by keeping the real cost of capital below the market cost, the notes report that:

"Headline inflation was expected to rise, owing to the effects of some tax increases, with the year-ended increase in the CPI rising above 3 per cent. The important question for the Board at its next meeting would be whether the new information materially changed the medium-term outlook for inflation."

The "new information" is the reading on inflation for the June quarter. That data is due out next Wednesday. But here’s a prediction: the RBA will not look at asset markets to find inflation. Of course, it need look no further than house and share prices, which have been propped up by various means. Without inflationary policies supporting asset markets, share and house prices would already be a lot lower.

But if the RBA instead looks at consumer prices, you never know what you’re going to get. The calculations, with their seasonal adjustments, never seem to address the fact that most of us know intuitively: the cost of living is going up faster than wages. The RBA chooses not to report this because it shows that deliberately targeting 2-3% inflation a year as the bank does is another way of saying you’re going to reduce purchasing power (sound and honest money) as a matter of policy.

If you put it that way, people would rightly punch you in the nose. But let us not forget what inflation is: theft. When you are allowed to purchase goods and services with newly created money that you get to use first, you are trading paper for real goods. The creators of paper money – central banks, commercial banks, and the government, get to use that money before it dilutes the purchasing power of all the other money in circulation.

It’s a good deal if you can get it. But then, any time you can legally steal the productivity of others – getting the fruits of their labor at a discount – it’s a good deal, even if it’s deeply immoral and unethical.

The other interesting note from the notes is the extended discussion of the stress tests of European banks. The RBA is trying to sort out if more bank failures or higher capital requirements in Europe could threaten Australian banks that source a lot of their lending overseas.

To us, this is an implicit concession that the cost of capital in Australia is not really determined by the cash rate set by the RBA. It’s determined by the global cost of capital. What does that mean? Tune in tomorrow for more discussion.

By the way, how do you know the real rate of inflation is understated? Check out the table below from the Treasury’s updated budget review for 2011 earlier this month. Notice that Treasury is forecasting 9.25% nominal GDP growth in the next fiscal year. This generous forecast is part of what’s expected to bring the budget back into surplus (along with high commodity prices and a historically high terms of trade).

But riddle us this: if the real GDP figure is just 3% and the nominal figure is 9.24%, doesn’t that mean that inflation is running at closer to 6.25%…?

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Source:Power, Coal & Inflation

How will China’s new Yuan policy affect the currency and gold markets…?

With CHINA dropping its ‘peg’ to the US Dollar, the financial world is expecting the Yuan to appreciate up to 30% over time, writes Julian Phillips at GoldForecaster.

But we don’t expect this at all. China has interests and will do no-one any favors unless they are in China’s interests. There are some who say it is in China’s interests as they may well need to cap rising inflation or cheapen imports. But China is a very different economy to any in the West and economic rules that apply to the West have to be modified in the East. So, what will happen to the Yuan now?

First, what was said by China? A narrowing balance-of-payments gap indicates that there’s no basis for "large-scale appreciation" by the Yuan, the Chinese central bank said. The Chinese version said no "large-scale volatility" was wanted, and continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. It ruled out a one-time revaluation, saying there is no basis for "large-scale appreciation", and kept the Yuan’s 0.5% daily trading band unchanged.

Today (Monday) it moved from last weeks Y6.8160 to Y6.7980 per Dollar, as a reaction to the news and the latest Yuan daily fix by the central bank. Why the rise? "The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability," the People’s Bank of China said, which is one way of describing China’s inflation rate jumping to a 19-month high of 3.1% in May, and China’s overseas sales jumped 48.5% in May from a year earlier.

"It is desirable to proceed further with reform of the Yuan exchange-rate regime and increase the Yuan exchange-rate flexibility. Chinese companies will have time to adapt to Yuan changes and the bank reaffirmed a government policy of ‘gradualism’ in exchange-rate reform. Increased Yuan flexibility and ‘two-way movements’ by the currency will aid management of the economy…"

There is very little here to suggest a big appreciation. But there is a great deal here to suggest a nearby move in the internationalization of the Yuan! The scope of conjecture that comes out of such a statement could point to many avenues of development, but all point to the arrival of the Yuan on the international scene.

The benefits, as argued in the media, could be strong for sure. But all tend to look to the benefits that the States and other countries would enjoy, as a reason for such opinions. Now stand in Beijing and place yourself as head of potentially an economy equal to that of Europe and Asia put together. You have the potential for huge unrest inside this burgeoning economy as the poor ‘have not’ look at the new ‘haves’ and want some of the action.

This is a fear of central government and one that they are acting on. They want development to spread right across China. They will harness all facets of their country to achieve these objectives. They do have considerably more power to reach this gold than any other government on earth. So when they say that they, "it is desirable to proceed further with reform of the Yuan exchange rate regime and increase the Yuan exchange rate flexibility…"

We believe that there is far more to this than simply releasing the exchange rate. The pressure from the US on the exchange rate will perhaps accelerate the process of internationalization of the Yuan, but with it should come with a lot of downward pressure on the Yuan.

And having said all the above, we have to ask you if you expect the Chinese government to promote gold so strongly to its citizens, as it has done, only then to engineer knowingly a fall in the Yuan Gold Price…?

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Source:China & the Gold Price