is the gold price all in the yuan

I've been puzzling over the unusual and seemingly counter-intuitive US dollar strength since mid-July. Given their horrendous fundamentals, the US dollar should have well and truly resumed its downward spiral by now. However, far from weakening, it has recently strengthened and, as I've pointed out, since mid-July it's had 12 out of 16 "up" days.

Why so bullish? Well, some are proposing this as the answer: the Chinese authorities are panicking.

Recently, statistics showed that Chinese manufacturing activity actually shrank in June for the first time in years.
http://www.bloomberg.com/apps/news?pid=20601080&sid=a5WZayG1omPQ&refer=asia

At about the same time, we have articles appearing, suggesting that there has been a change in policy regarding the Yuan. Remember that, for the past few years, the Chinese have allowed their currency to appreciate against the US dollar, under pressure from the World for the Yuan being so undervalued. Well, now we have:-

Renminbi fall fuels talk of policy shift

By Peter Garnham
Published: July 29 2008 03:00 | Last updated: July 29 2008 03:00

The Chinese renminbi yesterday recorded its biggest one-day drop against the dollar since its was de-pegged from the US currency in July 2005.

The renminbi, which is tightly managed by the Chinese authorities, lost 0.3 per cent to Rmb6.8189 against the dollar.

The move sparked speculation that China was moving away from using the appreciation of the renminbi as a tool to combat inflation towards using a weaker currency to boost export-led growth.

Can that be confirmed?

Well, yes, maybe:-


These two graphs are both of the Yuan/US Dollar exchange rates. They're not very clear, but the top one is the longer term (2003 to present) and you can see where the hard peg was removed. Note how consistent is the slide from 8.2 all the way down to a low of 6.812, in mid-July 08.

The second graph is a close-up of the action during the 2008 year. You can see that it bottomed out on exactly the same day that the US Dollar started to strengthen in earnest. Before that, the Yuan pretty much fell consistently, regardless of what the dollar was doing.

Now, this is quite an achievement. Because of the huge trade deficit which China runs with the US, without any intervention at all, the Yuan would sharply and continually appreciate against the dollar (as US dollars are converted into Yuan, demand for the Chinese currency is greater than that of the US dollar). In order to keep the exchange rates equal to each other, it takes a currency intervention equal to the size of their mutual trade deficit - a big number. However, in order to reverse the exchange rate in the face of such a large deficit, it takes a truly extraordinary amount of intervention!

So, if you want to know what's going to happen to gold, you could do worse than watching this exchange rate.

Yuan/Dollar Chart