China’s Gold Hoarding Spells Trouble for the Dollar

SMITH BRAIN TRUST -- China’s 57 percent hike in its gold reserves over the past six years, though lower than anticipated, illustrates the nation undercutting the dollar, says professor Peter Morici, economist in the University of Maryland’s Robert H. Smith School of Business.

Morici recently told Fox Business viewers that China has printed a lot of yuan the past 20 years to keep its currency cheap and build a big trade surplus with the United States.  “In turn, they get dollars from that,” he said. “And for years they’ve been putting (those dollars) in treasury securities. But sooner or later that dyke has to break.”

China’s economy is outgrowing that of the U.S. by 7-to-2 percent. Thus, China’s currency will rise in value, and those dollars are going to become worth a lot less. 

Gold, Morici added, “is dirt cheap” at under $1,200 per ounce – (the threshold price to keep mining operations profitable). “So (China is) basically shorting the dollar and going long on gold.”

Morici said all the dollars the Fed and European Central Bank have been printing that “are ending up in China’s hands and so forth … are going to be out there loose and causing inflation.  It’s going to happen. The question is when.”  At that point, gold “starts rising a lot” and “becomes a fear asset for the individual investor."

A separate development to watch, Morici said, is China moving toward making its currency convertible -- meaning more readily bought and sold without restrictions. “When this happens, the value of that currency is going to rise vis-a-vis the dollar and the euro," Morici said. "At that point, the Central Bank’s holdings of dollars and euros go down in value. Gold will go in the reverse direction. So they’re diversifying out of dollars into gold to prepare for that. This makes a lot of sense.”

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