A Few Different Angles on the Chinese Devaluation

This Week:

  • China’s Devaluation – a different perspective
  • The Impacts for New Zealand
  • The Next Silver Bull May Have Already Started
  • The (Silent) Summer Silver Spike
  • Will China Play The ‘Gold Card’? (Devalue the Yuan Against Gold)

Prices and Charts

Spot Price Today / oz Weekly Change ($) Weekly Change (%)
NZD Gold $1703.13 + $32.77 + 1.96%
USD Gold $1125.60 + $40.20 + 3.70%
NZD Silver $23.55 + $1.00 + 4.43%
USD Silver $15.56 + $0.91 + 6.21%
NZD/USD 0.6609 +0.0111 + 1.70%

The talk this week on the financial newswires has been all about the Chinese Yuan devaluation. Why it was done and what it means. We’ll come back to that shortly. But first our usual look at gold and silver and the NZ Dollar.

It seems a short squeeze might have finally developed in both gold and silver this week. We’ve seen both metals move steadily higher over the past few days in US dollar terms.

Gold is up 3.70% in US Dollars but not quite so much here in NZ with a stronger Kiwi from last week.

However as you can see in the chart below gold in NZ Dollars is again bumping up against the overhead trendline of the uptrend it has been in all year. Of interest is that the technical indicators are not looking too bad either. The RSI (top of chart) is not overbought yet and the MACD indicator has turned up which is generally a positive.

So for all the negativity we could well see higher prices ahead yet.

NZD Gold Chart

Meanwhile NZD silver has also bounced higher this week. Today it sits right on the down trend line of the narrowing wedge formation it has been building since January. Before long it will have to break out of this one way or the other. Given how negative sentiment is, we guess it might well be up.

This week silver in US Dollars broke out of the sharp downtrend it has been in since May. Now the question is whether this is just a short term bounce or something that might have longer legs and last a few months at least?

NZD Silver Chart

Turning to the Kiwi dollar, it sits at a key level still at 0.6609. So still holding just above the 0.65 level which as you can see in the longer term chart below is where the last line of support is.

Our Reserve Bank and just about every other one on the planet wants their currency cheaper. But they can’t all be cheaper at once. Given the US Dollar Index has been going sideways for the past few months perhaps we are nearing a change in trend?

NZ Dollar 10 year chart

For now we are well out of the oversold territory in the Kiwi. But we still haven’t seen it move much higher yet. So who knows where from here. It will need to hold above 0.65 or it is going even lower still most likely.

NZ Dollar 1 Year Chart

A Few Angles on the Chinese Devaluation

Over the previous 2 weeks we’ve shared a couple of articles that discussed the ending of China’s currency peg to the US dollar. See last week here and the week here before where we discussed the implications of this for New Zealand.

That has proven quite timely this week. As while China hasn’t removed the peg they have certainly wiggled it around and loosened it up a bit!

You see, 2 days ago they forced a 2% devaluation against the USD which is the Yuan’s biggest in 20 years. As can be clearly seen in the chart below from Bill Bonners daily letter:

Yuan Devaluation


“Remember, the yuan doesn’t “float” freely against the dollar. Instead of allowing the market to decide its exchange value, the People’s Bank of China (PBoC) sets its price daily.Essentially, the government allows the yuan to move within a tight band versus the dollar.The PBoC says yesterday’s 2% drop was a “one-off depreciation.”But if the devaluations continue – a likely scenario given China’s spluttering export machine – it will signal a new front in the global currency wars…

And an even more precipitous race to the bottom for the world’s major fiat currencies…”

So this was meant to be a one off but it’s also important to note another change to their policy. Moneymorning.com reports:

“…the PBOC had confined the yuan’s value to a 2% range above or below the U.S. dollar, called the “daily fixing.” Now the PBOC will let the yuan trade a bit more freely, basing the yuan’s value on its close from the previous trading session.The PBOC said the reason was to make the yuan’s value more market-based. That’s something that the International Monetary Fund (IMF) has urged as China seeks to get the yuan elevated to the status of a world reserve currency.”

So the Yuan could see a more steady decline against the dollar from here. Why?

Because the price will now be set based upon the close the previous day. So if the market pushes the Yuan lower each day, the next days price will be based upon the previous days lower close. So we could see it steadily walk down the staircase so to speak.

The mainstream headlines seemed to take this as a real shock. But as reported the last two weeks this was definitely on the cards as far as we were concerned.

The headlines seem to be mainly focused on the slowing Chinese economy and the need to lower the Yuan ands boost exports. a.k.a. a competitive devaluation.

The PBOC says it is “an improvement in the exchange rate system” which is what the IMF has recommended. This is perhaps one of the reasons why reports in the past week have said the China currency won’t be allowed into the Special Drawings Rights (SDR) this year.

So perhaps this move was in response to that? You could also argue it was China thumbing its nose at the West.

Adrian Ash outlined a number of other possibilities:

“Maybe we can thank the International Monetary Fund.Because last week, the IMF delayed making the Chinese Yuan a global reserve currency.Or maybe it was the weekend’s bad trade data…with Chinese exports crashing almost 9% in July from a year before.Or maybe it was the continued fall in the Japanese Yen on the FX market…making Japanese exports more competitive against Chinese goods.

Or how about deflation hitting neighbouring Thailand and south-east Asia? Or the Shanghai stock market’s 25% crash this summer? Or the pain hitting China’s huge gold mining and retailing industries as lower Yuan prices hit profit margins and deter fresh demand…?”

Physical GoldBut there is also another completely different angle. We’ve posted an article covering this on the website this week. Check that out below…

Another Strong Signal Yesterday to Own More Physical Gold

Will China Play the Gold Card?Somewhat coincidentally we also posted another article prior to the Chinese announcement by Mexican billionaire Hugo Salinas Price. Where he poses the question…

Will China Play The ‘Gold Card’? (Devalue the Yuan Against Gold)

They haven’t done that but perhaps we are just seeing the first steps? It is a very interesting article with a theory we haven’t seen elsewhere.

A US interest rate rise looks even less likely now.

Why’s that?

Because a lower Chinese Yuan will mean it’s cheaper for the US to import Chinese goods. Or put another way China will be exporting lower prices to the US. Lower prices are generally not what leads to a rise in interest rates. So we could well see the US economy slow down. While it’s dollar remains high it’s exports remain expensive and so US companies like Apple etc will continue to struggle and report lower earnings.


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Impact of the Chinese Devaluation on Gold

Another under reported angle is the impact on the gold price but also on premiums in China.

Even though China disappointed many with it’s recent lower than expect gold reserves announcement, perhaps it has put a “bid” under gold with this devaluation? Coincidentally the gold price seems to have headed higher following the devaluation.

According to Bullionvault…

“Today’s trading in Shanghai’s most active gold contract would have been a new all-time record…if it weren’t for Tuesday.Premiums over the world’s benchmark of wholesale London metal (explained here) are also rising…ending Wednesday at $6.50 per ounce, almost 3 times the last 12-month average.That’s a big incentive for Chinese importers to book new shipments. But will Chinese consumers and investors want it once it arrives?”

That is the question indeed.

If they have any sense they will see a lower currency ahead, a stock market likely to fall further and a property bubble likely ending and they will turn back to gold and silver.

What are the Implications for New Zealand of the Chinese Devaluation?

Well, we discussed this in the last 2 weeks so we’d recommend you go back and read them if you haven’t, Found here and here.

But in a nutshell the global race to the bottom is continuing. Everyone is trying to out-cheapen each other.

We still believe in the long run this will be very beneficial to holders of gold and silver. Silver in particular looks to have a lot of upside from here. (Check out the 2 articles on silver below for more on this).

Who knows if the bottom is in? But we are probably not too many percent from it. And in NZ dollars terms it may well be.

So it’s likely a good time to take a position and add to it in coming months.

Please get in touch if you have any questions.

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This Weeks Articles:

China and the New World Disorder

China And The New World Disorder – [and impacts on NZ]

2015-08-06 01:17:49-04

This Week: Update on Rising Silver Premiums in New Zealand GREECE, GUNS, BANKERS & GOLD Why the Silver Price is Not the Price of Silver Gold’s Downside Risk vs. Upside Potential China and It’s US Dollar Peg China And The New World Disorder – [and impacts on NZ]   Prices and Charts Spot Price Today […]

Read More…
Next Silver Bull

The Next Silver Bull May Have Already Started

2015-08-09 20:34:46-04

After some thoughts on silver based upon hard numbers? This article looks at silver supply, demand and possible impacts of the US dollar and US Federal Reserve moves on silver. The writer doesn’t believe the Gold / Silver ratio offers much for investors. However with it close to record highs (meaning it is taking a lot […]

Read More…
China Gold Card

Will China Play The ‘Gold Card’? (Devalue the Yuan Against Gold)

2015-08-09 21:07:35-04

In the latest piece from our favourite Billionaire, Hugo Salinas Price of the Mexican Civic Association for Silver, he wonders whether China may well devalue the yuan against gold as the next move in the international currency war. It’s an interesting argument that they might “raise” the Yuan gold price in order to:   (1) attract […]

Read More…
Silent Summer Spike

The (Silent) Summer Silver Spike

2015-08-11 22:44:48-04

The end of this silver bear market will be marked by default in the physical silver market. A bold statement that Chris Duane makes in his latest video below. He covers a good deal of ground in this video. We summarise it below for you and also give our perspective at the end: —Why you […]

Read More…
Strong Signal

Another Strong Signal Yesterday to Own More Physical Gold

2015-08-12 18:38:25-04

With the announcement this week of China’s Yuan devaluation getting plenty of coverage, we’ve got a slightly different take on it below from J.S. Kim. His angle is not the majority view that they have done it solely to boost their exports though. Read on to find out… Another Strong Signal Yesterday to Own More Physical […]

Read More…
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Today’s Spot Prices
Spot Gold
NZ $ 1703.13 / oz US $ 1125.60 / oz
Spot Silver
NZ $ 23.55 / oz
NZ $ 757.13 / kg
US $ 15.56 / oz
US $ 500.39 / kg


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