Greece has been occupying almost all the financial media as well as most traders and markets in the world. Every financial publication you pick talks about Greece and what its exit or not exiting can mean to the Euro.
Honestly, I do not think anyone knows what will really happen if Greece left the EU or not. We do all agree that Greek citizens will be in a heap of trouble, but the exact consequence of a Grexit or not is unknown.
But I digress….
Today I wanted to talk about the potential of China, the possibility of the Renmimbi becoming the next reserve currency in the world and the recent dramatic 30% drop in the Shanghai Stock market.
On one hand, China has been accumulating a lot of momentum for the Yuan and has signed dozens of bilateral currency agreements with countries to trade in Yuan and exclude the US Dollar. This has made the Renmimbi the second largest transacted currency even more than the Euro. The strategy to begin the move to replace the US Dollar by Renmimbi as the reserve currency will likely to be when China announces the pegging of their currency to Gold. For years, China has been accumulating gold reserves. Depending on whom you believe, China has between 8,000 to 14,000 thousand tons of Gold which can easily allow then to peg the Renmimbi to the Gold, albeit in a small fraction.
If this is to happen, we will see a surge of strong acts by China to start the final assault on the US Dollar and we will see significant turmoil in the currency and stock markets. No reserve currency in the world has gone down without a fight.
However, the counter to this challenge comes to China in the form of ballooning debt in the secondary gray debt market, the slowing down of its economy as well as the challenges China still faces as it regulates its internal markets such as the Shanghai stock market. The fact that we see a 150% growth in the stock market in the last one year and then a precipitous decline of 30% in last three weeks does not bode well for China to instill confidence in the world that it can control its markets and deserves the pride and status of owning the next reserve currency of the world.
My view is that China has hurt itself significantly in the past few quarters by allowing the unruly elements of its economy get the better of the planned method of growth they had embodied for the past decade and half. This also means that the US Dollar has a new lease on life for a couple of additional years until China can quell its internal chaos.
With all the uncertainty in the stock markets and my forecast of the currency markets facing increased turmoil in the coming months as well as the Debt markets continuing to be in bubble territory, investing in Commodities seems like the safest bet in the next few months. Yes, it is no longer a fashionable trend and Gold has not done much, but this is about safety and not necessarily returns.
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