For more than five years, the global financial system has been weighed under by a currency war that shows no sign of stopping. It is one of the primary reasons why central banks have resorted to zero or negative interest rates, and why countries like Japan have initiated a policy of endless QE.
But as we know in the gold markets since 2011, something or someone has been carefully creating a disconnect between the monetary metal and its checks against fiat currencies like the dollar. And it is one of the primary reasons why gold prices have not only declined 40% from their all-time highs in 2011, but have also lost its luster to most investors who only see gold as a commodity to be bought and sold like a security or stock.
Yet over in China and Japan, gold is not manipulated by their government or their central banks, and is reflected fairly correctly in price in relation to the Yen and the Yuan. And as China mulls the proposition of devaluing their currency another 10-15% in the coming months, gold, more than stocks or bonds, is proving to be the best investment for citizens within the 2nd largest economy in the world.
Finally, the real purpose of the PBOC's exercise in FX management today was, just like in August, to fire a warning shot at the Fed's rate-hiking plans.
Only this time the warning shot is far, far louder. In September the Fed postponed its rate hike as a result of China's devaluation. Will it do the same again next week? Because if China is about to unleash a 15% deval of the CNY against the entire world, expect a flood of Chinese FX reserves as the PBOC tries to control the glidepath of its currency, and avoid an all out collapse driven by soaring capital outflows.
In other words, we are now right back where we were in mid-August, just before the bottom fell out of the market. "The biggest risk in China is not really the economy," said Qian Wang, senior Asia economist for Vanguard Investments Hong Kong. "The real risk is, number one; the policy uncertainty, and number two; the currency. China is walking on eggshells.
"Chinese citizens, meanwhile, are anxiously awaiting tomorrow’s market open while mentally repeating the same three lines:
So with China signalling a new devaluation, and the U.S. Federal Reserve speaking on Friday of not only retracting the interest rate hike they did in December, but perhaps even taking rates down into negative territory, how can you protect yourself from this paradigm of currency devaluation that will not end until many if not all of these currencies end in collapse?