What happens to gold when the yuan floats free of the dollar?
by Lawrence Williams, MineWeb There has been much speculation in recent weeks regarding the likelihood of China announcing a much bigger gold reserve as a prerequisite for possible inclusion of the RMB (renminbi – or yuan the words are effectively interchangeable in terms of the Chinese currency) into a reset Special Drawing Right as a preliminary move towards recognition of the yuan as a global reserve currency. China has gone on record as suggesting that this should happen. Discussions within the IMF on a possible revision to the SDR will commence next month. But it is also apparent that there is little point in the yuan being brought into the SDR while it remains pegged to the US dollar. The idea of the composition of the SDR basket of currencies is that it should represent broad currency stability and having two significant components pegged directly to each other would rather defeat the point behind it. So, if we assume that a prerequisite for the inclusion of the yuan in a revised SDR basket will be an unpegging of the yuan from the dollar this opens up all kinds of interesting prospects and theories and I am indebted to Dr Fraser Murrell in Australia for pointing me to a fascinating, and apparently little read so far, article on the subject by J.C. Collins entitled: When Will China End The Dollar Peg which sets out all these factors in detail. I would commend anyone following this subject to click on the link and read it. Dr Murrell goes further himself with a suggestion that the recent strength in the US dollar may not be quite what it seems, but given the peg to the yuan it actually represents strength in the yuan dragging the Dollar up with it ahead of the unpegging of the currencies and a resultant sharp rise in the global valuation of the yuan. Who knows? But the ramifications of the above are that an announcement that China now holds gold reserves considerably in excess of the 1,054 tonnes it has reported since 2009, the possible inclusion of the yuan in a revised SDR, and the unpegging of the yuan from the Dollar are all inextricably linked and the countdown to this is already under way. The IMF will be holding a meeting in May which will start to discuss formally any revisions to the composition of the SDR. A second meeting will be held in October which will confirm any new changes and the revised SDR basket will come into operation on January 1st 2016. If the yuan is to form part of the new SDR, then the announcement of its unpegging from the Dollar would have to take place prior to the October announcement – or so the theory goes. Continue Reading>>>