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China Concerns, Crashing Currencies and the Future of Gold Purchases

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April 16, 2009 by goldguru 


The Sovereign Society submits:

With the International Monetary Fund, or IMF, poised to sell some of its gold this year, gold bug investors are on edge.

That imminent sale will probably put some pressure on gold this summer, but don’t let it depress you; the big picture remains unchanged as it pertains to the next dollar crisis, skyrocketing U.S. debt levels, and the drive to create inflation by deflation-battered and wounded central banks.

In addition to the above reasons, I’m a gold bug because of the obvious accelerated decay of the global exchange rate mechanism. And it’s not just a volatile dollar that’s the primary actor destabilizing the financial system; many other currencies fluctuate violently from one year to the next, causing disruptions in business activity, financial projections and cash-flow.

Currencies shouldn’t devalue or revalue by 20% or more in a short period of time. But that’s been the case since the demise of the Bretton-Woods gold standard in the early 1970s. Crashing currencies don’t evoke confidence among investors or businesses and ultimately lead to higher inflation and a lower standard of living.

About three weeks ago, China began to publicly express its concerns over exploding U.S. Treasury debt issuance. The Chinese hold about 40% of all outstanding American Treasury debt and, since 2001, have seen their dollar holdings decline vis-à-vis other currencies despite gains in T-bonds over the last decade. Basically, the Chinese appear to be growing frustrated with this quid pro quo arrangement whereby the United States consumes a fifth of her exports while Beijing supports the Treasury market by recycling part of its trade surplus into dollar-denominated Treasury debt.

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Comments

One Response to “China Concerns, Crashing Currencies and the Future of Gold Purchases”

  1. Jeff Stockton (Honolulu) on April 17th, 2009 11:58

    Your sentiment is right on the money. Its incredible how the dollar has managed to stay so strong. This is an indication of how flawed all currencies are. Another indication is how the Swiss have devalued their currency.

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