One of the more interesting stories this week has been reported by Bloomberg. The People's Bank of China is said to stop increasing its foreign currency reserves. What implications will this have? I believe that we'll see the start of a U.S. dollar collapse.
All these years, the Chinese bank had increased their balance sheet up to $3.66 trillion of which $1.3 trillion are U.S. treasuries (Chart 1). This is almost half of the PBOC's balance sheet. Other assets include U.S. agencies, U.S. corporate debt, U.S. equities and other non-U.S. assets (Chart 2).
If the PBOC is going to stop the purchases of foreign currency reserves, this means that they will stop buying the assets above and mainly stop buying U.S. treasuries. That's what it all comes down to. This also means that their excess of U.S. dollars will need to be converted to other assets like the yuan, or even gold. In fact, one of the ideas of China is to prepare the yuan as a reserve currency and I believe this is a first step in that direction. We know that China has amassed a lot of gold, when considering the amount of gold imports from Hong Kong. I believe the PBOC should have added significantly to its gold positions since 2009. The PBOC hasn't reported their gold holdings since 2009 but it is said that they own around 4000 tonnes of gold right now. Needless to say this will be very bullish for the yuan going forward. If we take a look at the chart of the USD/CNY exchange rate we see that the yuan has already increased a lot. I believe the yuan will continue its ascent. To bank on this trend, investors can buy the WisdomTree Dreyfus Chinese Yuan Fd ETF (CYB).
The Potemkin Villages were Russian constructions, created to deceive others into thinking something is better than it really is. The Potemkin Rally describes how the Federal Reserve is manipulating the market in order to create a deception of a rising stock market. It looks like the economy is improving, but it's actually just a mirage. As long as the following chart (stocks divided by Fed Balance Sheet) stays flat, the stock market rally is really engineered by the Federal Reserve. If the Federal Reserve takes the punch bowl away, everything collapses. I read about a very unusual correlation at Zerohedge . Apparently, there is a similarity between the employment to population ratio (red graph) and the Potemkin Rally (blue graph). (The Potemkin Rally graph measures the ratio between the stock market and the Fed's Balance Sheet.) There are implications if this correlation is true. It means that when the U.S. government prints money (otherwise known as QE), t...
We had some big news from India last week. India is about to build the largest solar plant in the world. Now what effect will this have on silver, because silver is the largest component of a solar panel. Let's talk about the numbers first. The project is said to produce energy at a rate of 4 gigawatt. The project is done in 7 years. After the first year of construction it will produce 1 gigawatt. Now, how much silver goes in a typical solar panel? Normally 2/3 ounce per solar panel or 20 grams of silver. A normal solar panel produces 80 watts at 15% efficiency if there is direct sun. So we have 2/3 ounces of silver per 80 watts of energy or 0.008333333 ounces/W. Let's convert that to gigawatt. Giga is 9 zeroes. If we use these numbers, then we would need 8333333 ounces of silver per gigawatt (if there is direct sun). Then over the course of the entire project we would need 4 gigawatt or 33 million ounces of silver in 7 years (if there is direct sun). Now we only have 6 hours ...
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