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china owning us debtIn a move that has been telegraphed for weeks (if not years) China finally announced last week that it sees no further benefit in stockpiling U.S. Treasuries and is going to look elsewhere for repositories of its vast oversupply of wealth. This is probably a smart move on China’s part, considering that the Fed may not taper Quantitative Easing any time soon, and may actually increase the program first: The Chicago Federal Reserve Branch recently said on Twitter that QE “will continue to be open ended. We may need to purchase 1.5 trillion in assets until January 2015.”

With this move representing yet another potentially disastrous turn of events for the dollar, one must question: How much should we fret over this? The answer, at least in the short term, is probably not too much.

On one hand, while China certainly holds the largest amount of U.S. dollars of any single foreign country, it is certainly not the only one, and actually only accounts for owning about 8.1% of our debt. The lion’s share of the debt is still held domestically: by Americans and American companies and institutions, by the Social Security Trust Fund and by our own Federal Reserve. While China could certainly be disruptive to our markets if it wanted to, it would not be in the country’s best interest. So it is unlikely that whether or how China follows through on this latest announcement, it would single-handedly have us paying $300 for loaves of bread tomorrow or next week.

BUT… on the other hand, what of the long-term implications? They may be dire, and they may confirm everything we’ve been saying about the future of the dollar.

China is not stupid. The reasons it is choosing to move away from the dollar are sound and logical. The Fed is being irresponsible and has backed itself into a corner with Quantitative Easing. Bernanke, Yellen & Co. have committed to inflating the currency until…? Until they no longer can, so it seems these days. Our anemic economy is going to have a tremendously difficult time creating value to back up all of these extra dollars. Eventually interest rates will have to catch up, which will put the brakes on the economy even more. Why would anyone be long on the dollar under these circumstances? Other holders of our debt will be paying attention to China’s reasoning, especially if they are putting their money where their mouth is. China’s 8.1% stake in our debt is one thing. But a 34.2% stake, which accounts for all foreign holders combined, is something else altogether.

Might China only be the first domino to fall? Might other countries follow suit? It’s very possible… and then perhaps even Americans will start paying attention.

Meanwhile, in spite of the massive amount of gold that China has been stockpiling, gold is still in a buying opportunity range. How long can that last? No one can be sure. The stars have truly aligned for those waiting for the right time to pounce on gold. All signs point to the dollar continuing to lose confidence, chasing investors to safe havens and hedges against inflation. If you’ve been waiting for the right opportunity, this may be it.

Precious metals on the move

London Fix PM price at week’s end, and change over previous Friday:

  • Gold: $1,246.25, down 3.2%
  • Silver: $19.93, down 3.4%
  • Platinum: $1,396.00, down 2.9%
  • Palladium: $721.00, down 1.1%

In the news

Stocks? Bonds? Mutual funds? “As long as you’re in dollars, you’re in trouble”
“As a measure of wealth the dollar bill is a disaster. Because dollar bills are printed by the Federal Reserve without anything of real value to back them up and because even more dollars are loaned into existence by Federal Reserve member banks, the ones you have in your pocket are constantly losing their buying power. It’s like if you were playing a game of Monopoly and one of the players could simply print money and spend it into the game whenever he ran out. Every time more worthless Monopoly currency is introduced, the value of the currency that is already in the game goes down because it is competing for the same properties on the game board.” – Michael Anthony Peroutka (link)

A weaker dollar means gold to go higher
“The key indicator right now is the U.S. dollar. When the U.S. dollar strengthened, gold has sold off. But we have seen the U.S. dollar sell off a little bit in the last couple of days, and our model actually ticked up. And we became buyers of gold.” – Brian Stutland (link)

Next gold “surge” to take the metal to $2,400 in 2014
“I am long of gold at the moment… once this cyclical correction is out of the way, and I think it will end in the next month, the next surge takes gold through $1,900 and up to around the $2,400 level next year. There is no doubt that the secular uptrend is still in place. And although it feels like the old trend is broken, history shows that such setbacks are quite normal in long-term secular uptrends.” – Robin Griffiths (link)

2014: The year for gold bullion investors?
“If the new Federal Reserve chairwoman is saying she will continue policies that are as aggressive (and possibly more aggressive) to even larger amounts of Quantitative Easing (money printing), this can only be bullish for gold bullion. Compared to earlier in 2013 when the Federal Reserve was considering the idea of reducing Quantitative Easing, this caused gold bullion to sell off. But now, the very thought of reducing Quantitative Easing appears to have been thrown out the window. With much more money printing coming down the pipeline – and gold bullion significantly underperforming the stock market – investors can look for a catch-up move in precious metals going forward.” – Sasha Cekerevac (link)

Chart of the week

Number of dollars entering economy continues to soar
This can only end one way…
m1 money supply

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In observance of the Thanksgiving holiday, we will not publish a Market Update next week. We wish you and your family a happy Thanksgiving!