America’s Gold Wiped Out

America’s Gold Wipe Out? A look at whose winning the currency war between China and the US, as well as how bad America’s finances really are.

Dear Readers,

The World’s Secret

We’re at war. But not one that’s fought with guns and missiles; one that is fought with currency.

Currency wars are fought globally in all major financial centers by bankers, traders, politicians and automated systems – and the fate of the economies and their affected citizens hang in the balance.

A “currency war” is a fight between countries to achieve a lower exchange rate for their own currency. In other words, its competitive devaluation.

In short, the cheaper your currency, the more money you attract from foreign entities; this leads to increased exports, growth, and job creation.

The dollar, the yuan, and the euro, are the three super power currencies leading the global currency war. The one on top will be the one that devalues its currency the fastest.

However, devaluation and currency wars never produce either the growth or the jobs that are promised, but they reliably produce inflation.

At the end of the day, one thing is for certain: The price of gold will rise (as it always has), to match the continual, yet competitive, nature of currency devaluation.

America’s Gold Wiped Out

No one truly understands just how out of hand America’s finances have become. America has, in fact, run trade deficits large enough to wipe out its gold hoard under the old rules of the game – the old rules being brought back to light given the world’s current financial conundrum.

If we were to think of America’s current finances under an evolved Bretton Woods system, China’s redemption of US Treasury notes would be more than enough to wipe out the entire gold supply of the U.S. and more. And this is perfectly plausible if we were under the rules of Bretton Woods.

While this may seem extreme, this is exactly how most of the world monetary system worked up until 40 years ago. It’s no wonder why the U.S Republican party recently called for a commission to look at the merits of a gold standard.

Sixty years ago the US had over 20,000 tons of gold. But because of consistently large trade deficits, it dropped to 9000 tons. In 21 years, US gold reserves dropped 11,000 tons of gold that mostly went to a small number of export powerhouses to make up for its trade deficits.

The Truth About Printing

Every day journalists and reporters talk about printing dollars, yet they have no clue what’s really happening.

But I am going to tell it to you straight.

I’ve mentioned this a few years ago in my letter, “Two Birds, One Stone: The American Secret.” Prior to 2011, no one was winning the currency war. China was experiencing a surplus and the US was negative. So the U.S. did everything it could, including persuasions through the G20, to convince China to appreciate their currency to balance out the major trade deficit.

But China wouldn’t allow their yuan to appreciate because it would hamper their own growth. Why would they hamper their growth for the benefit of a competing country?

As a result, the United States, empowered by its world reserve status, pulled out its secret weapon: Quantitative Easing (QE).

The United States effectively devalued its own currency by increasing its own money supply, forcing inflation onto China.

It now had an edge on this currency war.

China’s Inflationary Worries

When a Chinese exporter ships goods abroad and earns dollar or euros, it must hand over those currencies to the People’s Bank of China (PBOC) in exchange for yuan at a fixed rate by the bank.

When an exporter needs dollars or euros to buy foreign materials from other importers, it can get them; however, the PBOC only makes enough dollars or euros available to pay for the imports and no more. The bank keeps the rest.

This is how China is able to maintain a pegged exchange rate with the United States.

The process of absorbing all the surplus dollars entering the Chinese economy, especially after 2002, produced a number of unintended consequences.

The problem was that the PBOC did not just take the surplus dollars, but they purchased them with newly printed yuan. It meant that as the Fed printed dollars and those dollars ended up in China to purchase goods, the PBOC had to print yuan to soak up the surplus.

In effect, China had outsourced its monetary policy to the Fed. As the Fed printed more, the PBOC did too to maintain the pegged exchange rate.

The United States’ plan was working.

Not What You Believe

China was a booming economy and had bounced back nicely from the 2008 crisis. The United States was a struggling economy with little chance of near-term inflationary pressures.

In the short-term, QE hurt China more than it did the United States.

If China maintained their peg to the dollar, it was either appreciate their currency or experience higher inflation.

From June 2010 through January 2011, the yuan had appreciated around 4% and Chinese inflation was moving at a 5% annualized rate. That means the total increase in the Chinese cost structure was a total of 9%. Projected over several years, the dollar would decline over 20 relative to the yuan in terms of export prices.

QE was working.

The United States is now beginning to win the currency war with China.

China is experiencing inflation and yuan appreciation. Headlines continue to show that China’s growth is slowing and calls of a Chinese bubble are being talked about worldwide. China’s manufacturing just shrank for the first time in nine months.

Still think QE didn’t do anything?

The US trade deficit narrowed to $42.9bn in June, the smallest in 18 months. Exports increased 0.9 per cent to a record $185bn as US companies sold more consumer products, automotive parts, industrial supplies and capital goods abroad.

But there’s a big problem. When the US prints dollars and another country tries to peg its currency to the dollar, that country ends up printing local currency to maintain the peg, which causes inflation. That means as the Fed prints, the world as a whole experiences inflation.

Countries around the world are feeling the effects of this currency war. It’s created higher food prices in Egypt and stock bubbles in Brazil.

Printing money means that U.S. debt is devalued so foreign creditors get paid back in cheaper dollars. The devaluation leads to higher unemployement in developing economies as their exports become more expensive to Americans.

While inflation isn’t so bad on the home turf, developing countries experiencing even a slight rise in prices are feeling the tremors. Rising food prices for us are an inconvenience, but for those of smaller developing nations, it’s a matter of life and death.

As a Canadian, I hear people everyday around me loving how strong the Canadian dollar is. But in the long term, it does more harm than good.

The competitive devaluation of the dollar has caused the Canadian trade deficit to soar; it reached $1.8 billion in June, an almost twofold increase from the level a month earlier.

As a resource-rich nation, we traditionally have had trade surpluses, meaning we sell more to the world than we buy.

But since the recession, the economy has been consistently in trade deficit conditions – as a result of the American printing press. In the last four years, Canada has only posted a significant trade surplus eight times.

Uh Oh

Bernanke just announced there is a great chance of another round of stimulus at this week’s Jackson Hole Summit. The Fed has printed over $2 trillion yet unemployment remains at low levels. But China is beginning to lose ground on the currency war.

Will the next round of QE be the bullet used to cripple China? Bernanke has made it clear that stimilus is around the corner given the ‘grave concerns” of unemployment.

Previous rounds of QE have already sent gold to record-breaking prices. Imagine what it will do this time around.

The fundamentals for gold have never been better.

They’re printing dollars. They’re printing Euros. They’re printing Yen. They’re printing Sterling. And the Chinese has to print RMB to keep up.

A few weeks ago in my letter, “Your Last Chance,” I said that August may be your last chance at gold stocks bargain hunting.

Take a look at this chart:
GDX August
But don’t worry, you haven’t missed the boat; gold is about to breakthrough.

Bloomberg just reported that hedge funds “boosted bets on rising commodities to the highest in 15 months.”

Investors added another $1.47 billion to commodity funds in the week ending on August 22 – the third inflow of money in the past four weeks. Of that, $1.36 billion went directly toward precious metals: gold, silver, platinum, and palladium.

Data shows that traders are the most bullish they’ve been since last year. If we stablize at these levels, a lot of neutral players in the gold market will become buyers.


I find it absurd that journalists and reporters continue to talk about gold as if it didn’t mean anything. Most of them have never even bought gold, or anything associated with it.

Heck, the only stock they own is stock of their employers as part of an employee stock option plan.
Gold, along with silver, is about to breakthrough and that means quality gold and silver companies are going to see a major surge. The next surge in gold will prove to everyone that the rise in gold is real and here to stay.

Sentiment amongst dealmakers is getting a lot better and funding is back on the table.
The money will soon flow at an aggressive pace. I won’t be standing on the sidelines. Markets are closed tomorrow, so be prepared for Tuesday.

Until next week,

Ivan Lo

Equedia Weekly

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Comments 4
  1. Since the essay “America Gold Wiped Out” Sept 2012, London Gold price has fallen from $1700 to $1450 today. It appears America Government has made money and the Bull has not. I have recently been buying gold only asset ETF’s with monthly payout of gold companies dividend and option writing earnings. They are at an insane value paying out about 20% annual today. Even though the dividend rate has fallen over the past year, and gold is closer to a low, the dividend payout should remain nearly washed out and when gold recovers in 2014 or 2015 the assets of the ETF will rally providing a nice capital return. Adding the two, I believe the gross return will likely be as high as 100% by end of 2015.

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