China holds sway over US Dollar

China holds sway over US$

Diane Francis, Financial Post

Saturday, May 16, 2009

"The U. S. should be afraid, very afraid. China is questioning the dollar's status as a reserve currency and, at US$1,000 an ounce, gold has become the world's de facto currency." -- John Ing, Maison Placements in Canada

It is a chilling statement from an expert on both gold and China. But he is speaking the truth: In a G2 world (the United States and China), he who is the piper calls the tune, and China holds a US$2-trillion mortgage on the United States and is not happy.

This country, along with others that lend money to the United States, such as Saudi Arabia, will determine the value of the U. S. dollar and gold. And they have spoken. They are not buying more U. S. treasuries and are buying gold as a new asset class. China announced that it was doing so quietly, and recent reports are that the Saudis and others have been buying bullion and hocked gold jewellery from around the world.

The only way is up for gold prices because the United States, which backstops the International Monetary Fund, the world's lender of last resort, has had to become its own lender of last resort.

Washington has cranked up the printing presses in an unprecedented way, replicating the behaviour of its spendthrift corporations and consumers. This year's budget is US$3.5-trillion, bigger than any in history.

And as Ing points out, the "bi" in this bipolar global economy is China. Beijing has not only started to hoard gold but has continued to talk up a new reserve currency concept to replace the U. S. dollar. The only reason the Chinese and others don't dump U. S. dollars is because it would be like shooting themselves in the foot.

Inflation, on top of excessive money supply dilution, will (unless mitigated by growth or stoppage) reduce the dollar's value. Ing estimates that the printing of money to bail out banks, autos and the U. S. economy will create a catch-up in gold bullion prices: "Gold should be US$9,000 an ounce to cover the current and projected U. S. monetary base," he says.

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