Welcome to Illuminati Silver, we tell you
the truth about silver. Today is Monday 17th August 2015 and we are
going to address the recent devaluation of the Yuan and its impact on gold and silver
prices. There are many aspects to cover, so this video is a little longer than usual.
Firstly, we wish to apologise to our listeners for our delayed response. You see, it would
have been very easy to have given a knee jerk reaction to the PBoC devaluation of the Yuan,
which many of the pumpers did, literally within hours of the devaluation announcement. But
we wish our channel to be viewed and valued as one that gives carefully considered and
deeply researched views and opinions. We have spent many hours since the middle
of last week speaking to Bankers, Currency Traders, and Economists and read many differing
views on what is actually happening; as although we did expect a potential Yuan devaluation
we only envisaged it occurring after the September Federal Reserve Banks announcement on interest
rates. This is the current situation and its immediate
history. Last week saw multiple devaluations of the
Yuan against the US Dollar which resulted in a decline of about 3%. Although in global
currency terms this is not huge, it was the largest depreciation of the Yuan for 20 years.
In 2005 China reformed its currency system by unpegging the Yuan from a strict tie with
the dollar, in favour of a looser tracking policy.
This last year in particular has seen the US Dollar rise significantly, not least because
it has been seen as a ‘safer currency haven’ than others, and also because of the ‘market
belief’ in an imminent rise in interest rates, which has caused the Yuan’s value
to rise also. This has meant that China’s goods were becoming increasingly expensive,
especially when compared to its regional rivals South Korea, Japan and not forgetting Indonesia,
hitting exports quite considerably. For example, there was a drop in car sales of 6.6% in July,
and data at the weekend showing an 8% fall in over-all exports and slowing business growth.
Further, a survey tracking China’s factory output for July also missed expectations by
0.6% for the year. One can therefore understand the Central Bank’s/Government’s
concern over this worrying economic trend. In addition to this, and arguably just as
important, China has also been seeking to build on its 2005 reforms in an effort to
have the Yuan included in the IMF basket of Special Drawing Rights Reserve Currencies
or SDR. According to Reuters “The PBOC said it would
now calculate the daily yuan fix, by taking more notice of market forces, including the
closing price in the previous day’s trading session.
The devaluation sparked fears of a global “currency war” and accusations that Beijing
was unfairly supporting its exporters, but the central bank on Wednesday sought to reassure
financial markets that it was not embarking on a steady depreciation.”
The Bank’s move to include more information when setting its daily currency fix can be
seen as a relaxation of controls, moving the currency a step closer to satisfying the IMF’s
entry requirements. With Oil Prices falling again below $50 and
the prices of industrial and construction metals such as nickel, copper and aluminium
falling to 6 year lows, and a potential glut appearing on the World’s markets, the greatest
fear arising now is that of further deflationary pressures, thereby causing further downward
pressure on prices and delays by Industry to invest and expand in a ‘falling price’
environment. Now for you our listeners and us, the key
question on our lips is ‘what will this do for the price of gold and silver?
Well, the initial reaction to the devaluation was for Gold prices to rise, with silver following.
Matthew Turner who works in London at Australia’s Macquarie Investment Bank told Bloomberg:
“When Central Bankers lose control, as the PBoC appeared to do this week, gold tends
to do well.” New York Analyst Dane Davis of Barclays Bank said “Gold rose because
some investors initially thought the US Fed would delay its interest rate increase after
China devalued. But that seems to have passed.” We have seen in the past few days gold premiums
ease from $6.50 oz to its normal $2.50 oz. So we are all aware of the current situation
but what about the weeks and months ahead. Well, its true to say, that the FED will have
to look closely at its interest rate policy again, in light of the Yuan devaluation. Any
delay in raising rates, is likely to lead to a higher gold and silver price, as rates
were expected by 70% of the Financial Community to rise next month.
The devaluation of the Yuan may result in China purchasing more gold as a safe haven,
though one could argue that its Stock market should see a small rise due to potentially
increased exports. However, that said, although the PBoC bought 19.3 tonnes for its bullion
reserves during July; Carsten Fritsch, commodity analyst at Germany’s Commerzbank said “but
the monthly volume of 19 tonnes is maybe less than some would have expected”.
The most immediate factor that could affect the price this week is likely to be the releasing
of the FOMC minutes from last month’s meeting on Wednesday and also the Consumer price Index
also due the same day. So we are faced with an interesting balancing
act – will the price of precious metals fall further because of deflation (and especially
silver because of a potential lack of Industrial demand) or will their price rise because of
the fear of a currency war? As Barclays Bank pointed out this morning “that China’s
move last week to devalue its currency was bearish for gold as a commodity but bullish
for gold as a currency.” Citi Bank Research Dept. on the other hand believes that the
US dollar index will top 104 compared to the current 96 thereby undermining the price of
gold further. Our view is that gold will operate for the
next couple of weeks within a very narrow band, while the markets attempt to assess
the ramifications of China’s recent activities. It is true to say that September’s Interest
rate hike odds have now fallen from 60/40 in favour to around 40/60. Our view, is that
short-term at least, we now have a floor of around $1100 for Gold and $15 for silver while
the markets digest and analyse the situation. We are still concerned about deflation being
the more powerful factor which we feel could still undermine all commodity prices. The
key question though is whether Jim Rickards is right in his book “The death of money”
whereby other currencies follow suit and devalue further in retaliation. If that happens the
Gold in other currencies will rise in value, and in dollar terms will do so should the
Fed then delay interest rate rises, and even consider allowing the dollar to fall further.
The next few weeks will give us all a clearer directional trend.
We shall keep you updated as events unfold. We hope you like this video and found the
information beneficial. If so, please give it a thumb up, comment and if you haven’t
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Silver Illuminati owners come from a background of Banking, International Wealth Management
and Economics. Having now retired from these worlds we are not qualified to give investment
advice. Therefore, this and other productions must not be deemed to be giving such advice
and merely represent the personal views of its owners.