What is gold price suppression?

A few weeks ago, I might have argued that gold price suppression is a myth. The more I learn about it, though, the scarier I find the concept.

A few weeks ago, I might have argued that gold price suppression is a myth. The more I learn about it, though, the scarier I find the concept.

Gold price suppression refers to coordinated efforts to lower the price of gold. On the face of it, that sounds like a meaningless goal. Dig deeper, though, and you’ll see there’s a whole lot at stake; namely, the future of the U.S. economy.

If governments, institutions and individuals lose faith in the dollar as a reserve currency, the Greenback’s value will plummet. It will be much harder for the U.S. to borrow money, and government services will have to be slashed. With 48.5% of the U.S. living in a household that receives some form of government benefits (per the Wall Street Journal), slashing benefits could collapse the U.S. economy.

Here’s what really changed my mind about gold price suppression: a single diplomatic cable released by WikiLeaks (click here to see the gold price suppression cable from Wikileaks). In it, the U.S. Embassy in Beijing wrote to the U.S. State Department, warning that the Chinese government was proactively dumping dollars in favor of gold reserves in an attempt to undermine the dollar and raise the clout of the Chinese Yuan.

The cable highlighted an article titled “China increases its gold reserves in order to kill two birds with one stone” from a State-sponsored newspaper in China. It was apparently alarming enough for the U.S. Embassy to send it straight to the State Department. Here’s an excerpt from the story:

“The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency.

China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.

Of course, right now, the yuan is tightly controlled by the Chinese government. It’s difficult for retail investors to even invest in the yuan (see our post How to buy Chinese Yuan for more), but China’s showing signs of loosening that control.

It’s not in their interest to de-couple the yuan and dollar yet, since tying it to the Greenback keeps Chinese exports cheap. It is interesting, though, that China’s could be building up enormous leverage over the U.S.

“When they [China] want the dollar to fall, they will let it,” Mark Weisbrot, the co-director of Washington’s Centre for Economic and Policy Research, told Al Jazeera recently.

In the meantime, China’s accumulating gold, even while they realize that the U.S. could be working to suppress gold prices. Should the U.S. economy continue to stagnate, suppressing gold prices looks like a losing battle.


Top 5 best ways to short the dollar

Here are five simple ways to bet against the dollar; from opening a savings account in a foreign currency to investing in precious metals or American Blue Chip stocks.

1) ETFs. Perhaps the easiest way to bet against the dollar is by investing in an inverse dollar ETF. The PowerShares US Dollar Index Bearish ETF (NYSE:UDN) is the best in class with a daily trading volume around 156,000 shares. UDN shorts futures contracts as it tries to track the Deutsche Bank Short US Dollar Index (USDX) Futures Index. A better option, though, might be shorting an ETF that’s long the dollar in the form of UDN’s sibling, the PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP). UUP has a trading volume that’s 16 times higher than UDNs, and some sources argue shorting long ETFs is a better strategy than going long short ETFs.

2) Buy gold. Since the supply of gold is relatively stable, the precious metal’s price tends to behave independently of the actions at the Fed’s printing press. If the value of the dollar goes down, gold prices can stay the same, but it’ll still take more dollars to buy the same amount of gold. Throw increased investor demand for gold into the mix when inflationary fears are building in the economy, and you’ve got a recipe for surging gold prices.

3) Convert your dollars to yuan. The Chinese government has loosened the strings it has the yuan of late, finally allowing allowing Americans to open yuan savings accounts directly in the U.S. The Bank of China branches in New York and L.A. allow investors to save cash in the form of renminbi (deposit up to $20,000 a year). Kiplinger also recommends checking out EverBank, which offers savings accounts in 20 foreign currencies (provided you pay a 0.75 percent transaction fee when you buy and sell currencies). Accounts can be started with as little as $2,5000.

4) Invest in multinational Blue Chips. While companies like tractor-manufacturer Deere & Company (NYSE:DE), The Coca-Cola Company (NYSE:KO) and software company Oracle Corporation (NASDAQ:ORCL) are all headquartered in the U.S., they derive significant portions of their income overseas. In the case of Oracle, 70 percent of the company’s revenues come from business outside of the U.S. Not only does these investments give you exposure to emerging economies, they hedge your exposure to the dollar while paying a modest dividend.

5) Invest directly in foreign companies. In the tech realm, the Chinese market operates behind what’s been dubbed The Great Firewall. American tech companies can’t get in, and a lot of the country’s biggest tech companies aren’t yet trying to capture audiences outside the domestic market. That means growth in your investment is unmoored from the performance of the dollar. In tech, consider SINA Corporation (NASDAQ:SINA), the maker of a Twitter-like microblogging service called Weibo. China’s financial markets has a new player in wealth management company Noah Holdings Limited (NYSE:NOAH) and the Chinese advertising industry looks like it’s led by Focus Media Holding Limited (NASDAQ:FMCN). There are also numerous plays in China’s solar industry from JA Solar Holdings Co., Ltd. (NASDAQ:JASO) to Trina Solar Limited (NYSE:TSL) to name a few.



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How to buy Chinese Yuan

China’s currency is still undervalued by some 40 percent. Here are three quick and easy ways buy yuan if you’re considering the currency as an investment.

The Chinese yuan or renminbi has risen about 5 percent a year over the past five years, and some investors argue that China’s currency is still undervalued by 40 percent. If the dollar suffers from decreasing purchasing power in the coming years, the yuan could rise rapidly, and that’s got a lot of people looking at the currency as a potential investment (or at least a safe haven). Here are three ways to buy Chinese yuan:

1) Open a savings account with a Bank of China branch that’s based in the U.S. The Chinese government has finally started allowing Americans to invest in the yuan via savings accounts, according to the Wall Street Journal. Visit one of two Bank of China branches in New York (or the branch in L.A.), and you’ll be able to start a yuan-based savings account where you can deposit up to $20,000 a year in $4,000 per day increments.

2) Buy Chinese Yuan currency ETFs. There are at least two ETFs/ETNs that track the yuan. The WisdomTree Dreyfus Chinese Yuan Fund (ETF) (NYSE:CYB) is the most active with an average of 210,000 shares changing hands every day. The second, Market Vectors Chinese Renminbi/USD ETN (NYSE:CNY), has an average trading volume around 62,000 shares per day. The ETFs have largely traded flat since their inception. So long as the yuan remains loosely pegged to the dollar, this probably won’t change, but if the ties between the yuan and the dollar become strained, I expect these two stocks to appreciate quickly.

3) Invest in a Renminbi Non-Deliverable Forward (RMB NDF) currency exchange derivative. That’s a mouthful, but it’s actually one of the most interesting (and cheapest) ways to invest in the yuan. Offered by HSBC Holdings (NYSE:HBC), NDFs let you exchange a “pre-determined amount of Renminbi at a set exchange rate on a fixed date in the future.” If you think the yuan’s going to go up, you can buy expected Renminbi. If you think it’s going down, you can sell expected Renminbi.

This type of derivatives contract has a couple advantages: You just need to put down 25 percent of the contract amount as lien. The minimum contact amount is $10,000, which means you’d only tie up $2,500 in your investment. One bonus: no Renminbi changes hands as all transactions are settled in US Dollars. That means you’re not limited in how much you can buy or sell. You just have to find a buyer or seller and come to an agreement on an exchange rate that you’re comfortable with.

It’s hard telling where the yuan will be a year or two from now, but it’s even harder to imagine that the yuan will go down in that time.



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