Welcome to Illuminati Silver, we tell you the truth about silver.
Today is Monday 17th August 2015 and we are going to address the recent devaluation of
the Yuan and its impact on gold and silver prices.
There are many aspects to cover, so this video is a little longer than usual.
Firstly, we wish to apologise to our listeners for our delayed response.
You see, it would have been very easy to have given a knee jerk reaction to the PBoC devaluation
of the Yuan, which many of the pumpers did, literally within hours of the devaluation
announcement.
But we wish our channel to be viewed and valued as one that gives carefully considered and
deeply researched views and opinions.
We have spent many hours since the middle of last week speaking to Bankers, Currency
Traders, and Economists and read many differing views on what is actually happening; as although
we did expect a potential Yuan devaluation we only envisaged it occurring after the September
Federal Reserve Banks announcement on interest rates.
This is the current situation and its immediate history.
Last week saw multiple devaluations of the Yuan against the US Dollar which resulted
in a decline of about 3%.
Although in global currency terms this is not huge, it was the largest depreciation
of the Yuan for 20 years.
In 2005 China reformed its currency system by unpegging the Yuan from a strict tie with
the dollar, in favour of a looser tracking policy.
This last year in particular has seen the US Dollar rise significantly, not least because
it has been seen as a ‘safer currency haven’ than others, and also because of the ‘market
belief’ in an imminent rise in interest rates, which has caused the Yuan’s value
to rise also.
This has meant that China’s goods were becoming increasingly expensive, especially when compared
to its regional rivals South Korea, Japan and not forgetting Indonesia, hitting exports
quite considerably.
For example, there was a drop in car sales of 6.6% in July, and data at the weekend showing
an 8% fall in over-all exports and slowing business growth.
Further, a survey tracking China’s factory output for July also missed expectations by
0.6% for the year.
One can therefore understand the Central Bank’s/Government’s concern over this worrying economic trend.
In addition to this, and arguably just as important, China has also been seeking to
build on its 2005 reforms in an effort to have the Yuan included in the IMF basket of
Special Drawing Rights Reserve Currencies or SDR.
According to Reuters “The PBOC said it would now calculate the daily yuan fix, by taking
more notice of market forces, including the closing price in the previous day's trading
session.
The devaluation sparked fears of a global "currency war" and accusations that Beijing
was unfairly supporting its exporters, but the central bank on Wednesday sought to reassure
financial markets that it was not embarking on a steady depreciation.”
The Bank’s move to include more information when setting its daily currency fix can be
seen as a relaxation of controls, moving the currency a step closer to satisfying the IMF’s
entry requirements.
With Oil Prices falling again below $50 and the prices of industrial and construction
metals such as nickel, copper and aluminium falling to 6 year lows, and a potential glut
appearing on the World’s markets, the greatest fear arising now is that of further deflationary
pressures, thereby causing further downward pressure on prices and delays by Industry
to invest and expand in a ‘falling price’ environment.
Now for you our listeners and us, the key question on our lips is ‘what will this
do for the price of gold and silver?
Well, the initial reaction to the devaluation was for Gold prices to rise, with silver following.
Matthew Turner who works in London at Australia’s Macquarie Investment Bank told Bloomberg:
“When Central Bankers lose control, as the PBoC appeared to do this week, gold tends
to do well.”
New York Analyst Dane Davis of Barclays Bank said “Gold rose because some investors initially
thought the US Fed would delay its interest rate increase after China devalued.
But that seems to have passed.”
We have seen in the past few days gold premiums ease from $6.50 oz to its normal $2.50 oz.
So we are all aware of the current situation but what about the weeks and months ahead.
Well, its true to say, that the FED will have to look closely at its interest rate policy
again, in light of the Yuan devaluation.
Any delay in raising rates, is likely to lead to a higher gold and silver price, as rates
were expected by 70% of the Financial Community to rise next month.
The devaluation of the Yuan may result in China purchasing more gold as a safe haven,
though one could argue that its Stock market should see a small rise due to potentially
increased exports.
However, that said, although the PBoC bought 19.3 tonnes for its bullion reserves during
July; Carsten Fritsch, commodity analyst at Germany’s Commerzbank said “but the monthly
volume of 19 tonnes is maybe less than some would have expected”.
The most immediate factor that could affect the price this week is likely to be the releasing
of the FOMC minutes from last month’s meeting on Wednesday and also the Consumer price Index
also due the same day.
So we are faced with an interesting balancing act – will the price of precious metals
fall further because of deflation (and especially silver because of a potential lack of Industrial
demand) or will their price rise because of the fear of a currency war?
As Barclays Bank pointed out this morning “that China’s move last week to devalue
its currency was bearish for gold as a commodity but bullish for gold as a currency.”
Citi Bank Research Dept.
on the other hand believes that the US dollar index will top 104 compared to the current
96 thereby undermining the price of gold further.
Our view is that gold will operate for the next couple of weeks within a very narrow
band, while the markets attempt to assess the ramifications of China’s recent activities.
It is true to say that September’s Interest rate hike odds have now fallen from 60/40
in favour to around 40/60.
Our view, is that short-term at least, we now have a floor of around $1100 for Gold
and $15 for silver while the markets digest and analyse the situation.
We are still concerned about deflation being the more powerful factor which we feel could
still undermine all commodity prices.
The key question though is whether Jim Rickards is right in his book “The death of money”
whereby other currencies follow suit and devalue further in retaliation.
If that happens the Gold in other currencies will rise in value, and in dollar terms will
do so should the Fed then delay interest rate rises, and even consider allowing the dollar
to fall further.
The next few weeks will give us all a clearer directional trend.
We shall keep you updated as events unfold.
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Disclaimer: Silver Illuminati owners come from a background
of Banking, International Wealth Management and Economics.
Having now retired from these worlds we are not qualified to give investment advice.
Therefore, this and other productions must not be deemed to be giving such advice and
merely represent the personal views of its owners.