Are Yuan Speculators Moving Out of Yuan And Into Gold?

Jay Taylor – LINK – sent me this analysis of China’s devaluation by John Lee, Executive Chairman of Prophecy Development Corp.  Prophecy raised over $100 million to acquire a large silver mining project in Bolivia and coal projects in Mongolio.  He spends a substantial amount of time in China.

One of the “no-brainer” carry trades over the past couple years has been to short, or “borrow,” dollars and yen a very little cost and invest the proceeds in yuan.  The yuan had been going up in value vs. the dollar since 2006.  But China’s move to begin devaluing the yuan is prompting speculators to unwind the is fiat currency “arbitrage” carry trade en mass.

John goes through the various possibilities of why the Yuan was devalued and concludes it stemmed from massive capital outflows and foreign exchange reserves which are down by $400 billion during the first half of this year.  A large amount of that has moved to Hong Kong, Taiwan and Singapore. He is suggesting that this flow is moving toward gold as owners of large chunks of capital are tiring of dollars and euros.

China and India are two of the world’s largest gold consumers. Naturally, gold prices should have gone down when the RMB was devalued, given the reduced Chinese purchasing power for gold. Quite to the contrary however, gold prices went up during five straight trading days following the RMB devaluation.

The reason? Are RMB speculators possibly moving out of RMB into gold? This could be entirely plausible as RMB investors were likely seeking an alternative to the US dollar and the euro in the first place. Commodity currencies remained unattractive given the slowdown in the world’s economy.

The gold market is small, with annual gold production amounting to approximately US$160 billion, and total above ground gold stocks amounting to approximately $8 trillion, in all shapes and forms. Even the slightest increase in physical demand for gold can have a profound impact on the price of gold.

You can read the rest of this analysis here:  RMB Devaluation, China’s Foreign Reserve And The Price Of Gold

7 thoughts on “Are Yuan Speculators Moving Out of Yuan And Into Gold?

  1. When gold gets a little bid here it will engender more buying. Once the US stock markets lose more value as basically all other stock markets in the world already have, gold will explode to the upside. The US will fall last but the thud will be tremendous. Hope there will be live coverage on CNBC! 🙂

  2. Not much in the way of BS gets past your nose, does it, Dave? Thank you for what you do, I for one appreciate it (you’re not ‘gloom and doom’, you simply have a heightened sense of reality).

  3. Mike Moloney is right ,check this story from OZ. These people won’t be happy till the destroy everyone else’s wealth.

  4. Thanks for your great work Dave. Could you explain why gold should have gone down in RMB after the recent devaluation a bit more? Seems to me the opposite should be the case – if a currency drops, then it would require more currency to buy the same thing that previously required less currency before the drop. Further, wouldn’t a drop in a currency spur more pm buying, thus increasing demand as folks realized that their currency is losing purchasing power?

    1. Sure good question. I think what he meant to explain is that the price of gold imported into China would become more expensive and it would reduce Chinese demand. At the very least a high cost of gold in yuan terms should have reduced Chinese demand. But based on deliveries into the SGE and based on the reaction of the dollar price of gold, demand appears to have increased.

      I actually suggested in a blog piece right after the deval that the move would increase demand in China because a rational investor would want to move their money out of a devaluing currency and into hard currency, i.e. gold

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