China Is Preparing for a Massive Dollar Freefall, Are You?
Jun 29th, 2009 | By Contrarian Profits | Category: Top StoryChina is making preparations for the ultimate demise of the dollar … and so should you. Stories knocking the dollar never get much exposure in the mainstream media (many outlets wrongly consider it unpatriotic to bash the buck).
But here’s the story in a nutshell. Li Lianzhong, a senior economist in the ruling Chinese Communist Party, directly attacked the dollar yesterday. Li’s message is simple: China should buy more gold because the dollar is poised for a fall. Li also said that China should use more of its $1.95 trillion in foreign reserves to buy energy resource assets.
Speaking at a forex and gold forum, Li asked the very valid question, “Should we buy gold or U.S. Treasurys? The U.S. is printing dollars on a massive scale, and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall. So gold should be a better choice.”
There is no doubt in our minds that China – the largest holder US Treasurys with $763.5 billion worth of bonds at the end of April – is maneuvering to reduce its exposure to the buck.
China has already said it will buy up to $50 billion worth of bonds denominated in Special Drawing Rights. These are essentially potential claims on freely usable currencies issued by the International Monetary Fund.
And on April 24, China revealed it had increased its holdings of gold to 1,054 tons from 600 tons since 2003.
Charles Delvalle offers another way to protect yourself from a dropping buck. Charles reckons that as the dollar has lost value the stock market has risen. In a recent e-mail to the crew at Notes he said…
“As long as the dollar isn’t dropping catastrophically then a falling dollar may actually be good for the stock market. Since March 9th, while the stock market has increased over 25%, the dollar has lost 10% of its value. What this shows is that as long as the dollar isn’t dropping catastrophically then a falling dollar may actually be good for the stock market. It means that the velocity of money is increasing. In other words, cash is moving out of bank accounts and into the markets.
“So one way to play a falling dollar is by going long the market. My suggestion is to buy into the strongest index right now, the Nasdaq. You can do that by buying shares of the Powershares Exchange Traded Fund (QQQQ) which tracks the Nasdaq.
“Another way to play a weaker dollar is by betting that the currency itself will fall. You can now do that easily thanks to ETF’s. One ETF which increases in value as the dollar drops is the PowerShares DB US Dollar Index Bearish (UDN).
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To the contrary the US media likes bashing the US and the dollar and unquestioningly accept the rhetoric of Chinese politcians. When it comes to local home grown politicos, the meida knows when politicians lie, because their lips move. But Chinese politicians are given a free ride. Even in this comment, more attention is paid to what is said with little about what is done. The incontrovertible fact is that the Chinese increased their Treasury holdings by almost 40% in H2 08 and bought throughout. Q1 09 before some light profit-taking in April. a 5% shift of Chinese reserves into gold would be roughly equal to 1 year’s world godl output. China officials are also clear that their vision of international monetary reform is not going to challenge the dollar in the near-to-intermediate term. I would also think that what is left unsaid is more important than what is said. Chinese anti-dollar rhetoric leaves unsaid that as most global imbalances are reduced, like the US trade deficit, Japan’s trade surplus, etc., China’s trade surplus has grown. It is also left unsaid, that China’s currency has become re-pegged (effectively) against the dollar for the past year. Som many punidts and observers seem to forget that China’s currency is not convertible. Lastly, too many seem to view is lack of democracy as a virtue rather than a problem.