China rejects dollars for new Yuan

[Jlaw]

Gold backed currency work when you have a certain amount of gold you can back up the value of your fiat currency. In another word, instead of holding 100 tons of gold, you are holding fiat currency that worth 100 ton of gold and that same 100 tons of gold instead of being store in local banking institution, they were stored under federal reserve.

Yes that was supposed to be the case. However, bankers / government got greedy and removed the note on the bill that allowed people to exchange it for gold to "Legal Tender". This allowed them to print infinite amount of money thus causing all these economic instability and inflation

 

[jhungary]

Yes that was supposed to be the case. However, bankers / government got greedy and removed the note on the bill that allowed people to exchange it for gold to "Legal Tender". This allowed them to print infinite amount of money thus causing all these economic instability and inflation

you missed the point.

The gold standard should not be used in the first place, you can never use a finite item to back an infinite things.

Bretton Wood was long dead before US unilaterally terminate the exchange rate, the world's economy has already falling apart by the time Nixon did it in 1970. The developing nation back then (Mainly Germany and Japan) have to rely on the US Exchange rate to keep their development afloat, as they do not have any enough gold themselves to keep their own economy together.

Had US not unlink the currency back then, the debt allocated to Japan and Germany as well as any developing nation would bring down the world economy and completely collapse the basic financial structure world wide. This is not about greed, it's about the currency is no longer able to represent the need for market. Do bear in mind, currency is always the biggest trade that trump anything, and that including economic development of any country.

 

[Zsari]

The Gold Backed RMB is basically nothing but a pipe dream, what it was is to instead rely on Dollar Bond, the Chinese tried to put their reserve on gold (by liquidate USD to buy gold) This could not work because to do that, China need more gold than they have stowed to be able to back the world second economy, which means they were to buy from other countries as well, and that would involved the USD.

At the time China sell their USD, this will devalue the USD in the international trade (As you flood the market with USD), and which mean you will get less RMB for every dollar you sell, at the same time, the Gold Price would be higher (projected, as buying activities increase) or at least the same (kind of a wishful thinking) That would mean you will need more RMB to buy gold. That would means RMB reserve would be seriously depleted (if not completely depleted) by the two acts (Selling USD and Buying Gold), That means the value of RMB would crash.

This move will basically bring down every country in this world, with the exception of the United States, simply because regardless on how USD being valued, $1 USD will also be $1 USD, which means US will be the only exception (along with country that have USD as their official currency) where other will collapse.

If China sells USD to buy gold, then gold price vs the dollar would go up, that however doen't mean RMB will go down with the USD. If RMB is gold backed instead of pegged on dollar, it only means RMB will go up along with gold. At this stage it's not in China's interest to see the RMB go up against the dollar. However as long as it has a large trade surplus, it will have the USD to slowly accumilate gold.

 

[jhungary]

If China sells USD to buy gold, then gold price vs the dollar would go up, that however doen't mean RMB will go down with the USD. If RMB is gold backed instead of pegged on dollar, it only means RMB will go up along with gold. At this stage it's not in China's interest to see the RMB go up against the dollar. However as long as it has a large trade surplus, it will have the USD to slowly accumilate gold.

........No........Because free market follow supply and demand.

If China sell its 2 trillions USD Bond along with any USD Forex, then it will place a sell order in the market, which means the supply of USD Spike by whatever the Sell Order entail, assuming no demand increase (such as an INCREASE of demand of USD to pay bill by a third country, say Japan) the Demand of USD remains the same. Then according to the basic supply and demand rules, USD devalue. And the value of RMB get back in each subsequent Sell order will be lower.

On the other hand, if China buy golds, which they will place in a buy order, unless China buy gold using USD (Which will then negate the RMB backed gold system), the demand of Gold increase and the supply remain the same. And then the gold price would spike. Worse case scenario. China buy gold with RMB but reference to the price of USD as per international gold market. Then on one hand, RMB will lose value and inflate (by the act of selling USD) and gold will also be inflated (as USD is weaken)

For example. A gold worth 1245 USD per tray ounce today. And 1 USD to 6.4 RMB.

If China start selling USD, then the USD will be weaken, and RMB will be strength, So, 1 USD will worth less (weaken) than 6.4 RMB, let's say it's now 5 RMB to 1 USD. Then if the gold price remain unchanged. Then to buy 1 once of gold, China would have to pay 1,743 RMB/ounce more than before selling USD

And finally, if China have a gold backed RMB, then they would have enough gold to back the RMB currency structure already, they would not be buying gold. The problem is, how do you get enough gold to back your currency structure?

Also, do remember, 40-45% of world gold are privately own, even if China sourced about 55% of the other gold, Chinese economic is still too big to back by gold, US have about 60-70% of world gold reserve in the 1950s yet the Bretton Wood system still fail, go figure.

 

[Zsari]

........No........Because free market follow supply and demand.

If China sell its 2 trillions USD Bond along with any USD Forex, then it will place a sell order in the market, which means the supply of USD Spike by whatever the Sell Order entail, assuming no demand increase (such as an INCREASE of demand of USD to pay bill by a third country, say Japan) the Demand of USD remains the same. Then according to the basic supply and demand rules, USD devalue. And the value of RMB get back in each subsequent Sell order will be lower.

On the other hand, if China buy golds, which they will place in a buy order, unless China buy gold using USD (Which will then negate the RMB backed gold system), the demand of Gold increase and the supply remain the same. And then the gold price would spike. Worse case scenario. China buy gold with RMB but reference to the price of USD as per international gold market. Then on one hand, RMB will lose value and inflate (by the act of selling USD) and gold will also be inflated (as USD is weaken)

For example. A gold worth 1245 USD per tray ounce today. And 1 USD to 6.4 RMB.

If China start selling USD, then the USD will be weaken, and RMB will be strength, So, 1 USD will worth less (weaken) than 6.4 RMB, let's say it's now 5 RMB to 1 USD. Then if the gold price remain unchanged. Then to buy 1 once of gold, China would have to pay 1,743 RMB/ounce more than before selling USD

And finally, if China have a gold backed RMB, then they would have enough gold to back the RMB currency structure already, they would not be buying gold. The problem is, how do you get enough gold to back your currency structure?

Also, do remember, 40-45% of world gold are privately own, even if China sourced about 55% of the other gold, Chinese economic is still too big to back by gold, US have about 60-70% of world gold reserve in the 1950s yet the Bretton Wood system still fail, go figure.

China is not going to or can't sell USD for RMB. It's going to or rather it has been buying gold with USD. USD goes down, and gold goes up. And gold goes up meaning you'll need less gold to back your currency.

 

[jhungary]

China is not going to or can't sell USD for RMB. It's going to or rather it has been buying gold with USD. USD goes down, and gold goes up. And gold goes up meaning you'll need less gold to back your currency.

2 problem

1.) If China use USD to buy gold. It would be the same as you buy Gold certificate using USD, it does nothing to RMB. You are simply changing the value of USD to Gold, which the gold can still be freely converted back to USD. Just that instead of holding USD or its bond, you are holding gold. If you want a Gold backed RMB, you will need to buy Gold with RMB directly, and have people trade gold with you with RMB. Otherwise, you will still be depending on USD for its conversion rate, then it's a moot point.

2.) It did not work that way, the more gold you get, that only means the more gold you are holding, let's say you can buy all the gold there are, in the market (Which itself is highly unlikely) it does not mean you get more value for your gold, gold price itself must be independent than its value as currency, otherwise, if gold price is going to be floating, then you cannot have a stable conversion rate between gold and RMB.

In layman term, if Gold Price is floating and the conversion rate is referred to the Price itself, then the 100RMB note today would have a different value than the 100 RMB note tomorrow. It sort of defeated the purpose to use gold as a "STANDARDIZED" Currency.

 

[powastick]

US had violate the Bretton Woods agreement because people found out US had been printing money to finance their deficit. This lead to massive outflow of gold, as people keep dumping US dollar for gold.

 

[Zsari]

2 problem

1.) If China use USD to buy gold. It would be the same as you buy Gold certificate using USD, it does nothing to RMB. You are simply changing the value of USD to Gold, which the gold can still be freely converted back to USD. Just that instead of holding USD or its bond, you are holding gold. If you want a Gold backed RMB, you will need to buy Gold with RMB directly, and have people trade gold with you with RMB. Otherwise, you will still be depending on USD for its conversion rate, then it's a moot point.

2.) It did not work that way, the more gold you get, that only means the more gold you are holding, let's say you can buy all the gold there are, in the market (Which itself is highly unlikely) it does not mean you get more value for your gold, gold price itself must be independent than its value as currency, otherwise, if gold price is going to be floating, then you cannot have a stable conversion rate between gold and RMB.

As you've said already RMB is not gold backed at this point, which means the two points you've raised are irrelevant at this stage. China only uses USD to accumilate gold, it is not at this stage using the gold to back its currency, which also means gold will gain more value in RMB if it goes up again USD.

 

[Jlaw]

US had violate the Bretton Woods agreement because people found out US had been printing money to finance their deficit. This lead to massive outflow of gold, as people keep dumping US dollar for gold.

A lot the European countries sent their gold to the US in exchange for USD. But now they know it is very hard to get gold back from US.

http://www.mining.com/us-still-holds-54-billion-of-germanys-gold/

 

[jhungary]

As you've said already RMB is not gold backed at this point, which means the two points you've raised are irrelevant at this stage. China only uses USD to accumilate gold, it is not at this stage using the gold to back its currency, which also means gold will gain more value in RMB if it goes up again USD.

Dude............How is my 2 points are irreverent? As they are what China need to do IN ORDER TO BE GOLD BACKED

You cannot simply just announce your currency are now gold backed. YOU NEED ACTUAL GOLD to back your currency, care to explain how China to get gold beside the point I have raised?

China simply cannot use USD to accumulate gold as you said, as you are holding 1.5 trillion worth of US Treasury Bond, not actual US Dollar. And you don't actually know how much Forex there are is actual USD reserve, and finally, even if it's like you said, China uses a trade balance each year to buy gold, then the buying order is going to be small each year (in millions) and this will not dent the buffer of Gold Price.

US had violate the Bretton Woods agreement because people found out US had been printing money to finance their deficit. This lead to massive outflow of gold, as people keep dumping US dollar for gold.

This is not even remotely how the collapse of Bretton Wood system end......lol

 

[xunzi]

Any country rely on the US dollar for their prosperity is going to face a heavy price. In fact, it happened in 97 and 08. It is a lesson and we are taking small step each to rely less on US's goodwill.

 

[Zsari]

Dude............How is my 2 points are irreverent? As they are what China need to do IN ORDER TO BE GOLD BACKED

You cannot simply just announce your currency are now gold backed. YOU NEED ACTUAL GOLD to back your currency, care to explain how China to get gold beside the point I have raised?

China simply cannot use USD to accumulate gold as you said, as you are holding 1.5 trillion worth of US Treasury Bond, not actual US Dollar. And you don't actually know how much Forex there are is actual USD reserve, and finally, even if it's like you said, China uses a trade balance each year to buy gold, then the buying order is going to be small each year (in millions) and this will not dent the buffer of Gold Price.

China uses USD to purchase US Treasury Bond, not the otherway around. It doesn't need to accumilate anymore treasury bond, which is why you see alot of aquisition, using USD to buy hard asset, including precious metal. FYI, Chinese yearly trade surplus is over $400 billion, not in the millions.

 

[jhungary]

China uses USD to purchase US Treasury Bond, not the otherway around. It doesn't need to accumilate anymore treasury bond, which is why you see alot of aquisition, using USD to buy hard asset, including precious metal. FYI, Chinese yearly trade surplus is over $400 billion, not in the millions.

1.) China use FOREX (Not USD) to buy US Treasury Bond, it could have been anything, it could have been GBP, USD, RMB or even HKD.

2.) I never said China need to accumulate Treasury Bond, I said, you cannot use Treasury Bond to buy gold directly.

3.) How much of those 400 billions can be used to buy gold? To give you a hint, Chinese GDP is about 11 Trillions dollars last year, and the Trade Surplus is about 400 billions, yet Chinese Forex decreased by ~300 billions (from 3.6 trillions to 3.2 Trillions) so, exactly how much of those 400 billions you supposed you can use to buy gold?

By the way, millions of ounce of gold worth billions of dollars, do remember 1 tray ounce of gold currently are selling for 1250 USD per ounce. So, even if you can buy with full surplus, it would still be Millions of Ounce.

 

[somebozo]

China has reportedly decided "there can be no conversion of gold-backed Yuan to or from US dollars." What China fears is that many countries around the world will want to trade their reserve US dollars for the new Yuan, leaving China with mountains of worthless US dollars. China already has several trillion in US dollar reserves and does not want or need more.

China will be losing its gold for paper backed by essentially nothing..so this is an important move..to not lose your gold to worthless paper..anyone who owns the chinese gold backed yuan essentially owns a piece of chinese gold bullions..

 

[Zsari]

1.) China use FOREX (Not USD) to buy US Treasury Bond, it could have been anything, it could have been GBP, USD, RMB or even HKD.

2.) I never said China need to accumulate Treasury Bond, I said, you cannot use Treasury Bond to buy gold directly.

3.) How much of those 400 billions can be used to buy gold? To give you a hint, Chinese GDP is about 11 Trillions dollars last year, and the Trade Surplus is about 400 billions, yet Chinese Forex decreased by ~300 billions (from 3.6 trillions to 3.2 Trillions) so, exactly how much of those 400 billions you supposed you can use to buy gold?

By the way, millions of ounce of gold worth billions of dollars, do remember 1 tray ounce of gold currently are selling for 1250 USD per ounce. So, even if you can buy with full surplus, it would still be Millions of Ounce.

Chinese forex decreased by 300 billion, do you know what that 700 billion difference was used for? Yes, millions of ounce of gold worth billions of dollars, and hundreds of billions of dollars in term worth hundreds millions of ounce, which translate into thousands of tons.