George Soros sees renminbi link saving the US dollar
Posted on 25 October 2009 with no comments from readers
So long as the Chinese renminbi is linked to the US dollar billionaire hedge fund manager George Soros says he does not see how the decline in the US dollar can go too far.
It is this sort of simple logic from the man who broke the Bank of England for a $1 billion profit in 1992 that makes currency traders sit up and pay attention. Mr. Soros has also made some bad calls but his $7 billion fortune stands as testimony that he is right more often than he is wrong.
Lack of confidence
In an interview with the Financial Times he also noted: ‘There is a general lack of confidence in currencies and a move away from currencies into real assets’.
Americans are obsessed with the Fed and its money printing while ignoring the inconvenient truth that this is happening all over the world. The Chinese stimulus package equivalent to 14 per cent of GDP dwarfs the American plan, and is pumping money into the economy at a furious – some would say unsustainable – pace.
Meanwhile, observers have become quick to predict the demise of the US dollar while perhaps not appreciating that what they are forecasting has already happened. The dollar has, for example, lost half its peak value against the euro, and is desperately low against the yen.
Dollar rally?
All currency values are relative and the US dollar may be close to the limit of its decline against other major currencies whose governments are also having to bail out their economies in difficult times. Indeed, there is quite a good reason to expect a dollar rally.
That would come if global stock markets decide to end their current rally which seems more to do with liquidity sloshing around than economic fundamentals. If Mr Market switched in manic fashion from optimism to pessimism then falling stock prices would produce an automatic rally in the US dollar as we saw last autumn.
Would that also undermine the current interest in ‘real assets’ that Mr. Soros notes? That is a tougher call but industrial commodities would surely suffer in a reassessment of the economic outlook. Precious metals might hold on as a safe haven like the US dollar, although that did not hold true a year ago.
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From Tom Stevenson writing in The Telegraph today about governments printing money and the gold price:
Arguably, governments have no viable alternative. Drowning in debt they could default, but it is scarcely conceivable that this is being considered in either Washington or London. The only honest way out is the slow grind of tax hikes and spending cuts but anything that is remotely acceptable politically will be totally inadequate fiscally. The required cuts in the US – perhaps a quarter of government spending – are even more implausible.
Printing money remains the time-honoured way out – and it will end as messily as it always has. Hard assets, the king of which is gold, and the shares of companies that produce them are a must for anyone looking to survive this institutionalised generational theft.
Meanwhile, central banks are seriously underweight when it comes to gold, with China and Japan keeping a tiny fraction of their reserves in gold. Just shifting 10pc of their reserves into gold (Europe’s weighting is 70pc) would involve the purchase of gold equivalent to nearly four times the amount currently held in exchange-traded funds. This would be massively destabilising for the gold market.
Gold shares are currently valued at roughly the same multiple of earnings and assets as they were in 2003 despite the gold price being three times higher. Even at today’s nominal high, the real inflation-adjusted price of gold is 40pc below its all-time high 20 years ago.
Gold is not the only way to protect yourself against the policy errors that politics and psychology make a racing certainty. Index-linked bonds look good value. But my favourite alternative is platinum. It shares some of gold’s precious metal appeal with the added kicker of sharply rising global demand for catalytic converters and a price that was shot to pieces during the industrial collapse a year ago.
“The Chinese stimulus package equivalent to 14 per cent of GDP dwarfs the American plan, and is pumping money into the economy at a furious – some would say unsustainable – pace.”
Yes, the Chinese may be creating their own bubbles with their stimulus package. But at least they have the money to pay their stimulus. They did not have to borrow from other countries. That is the big difference between the Chinese and American stimuli.
Peter,
I view this economic crisis like a game a chess. I’m trying to position my pieces (assets) to protect and perhaps even win. A part of my strategy is a gold and silver position. Something I’ve observed lately is an abundance of gold and silver products. I can virtually buy products from any country. And the US mint has sold 22 million silver eagles this year. (gold eagles around 982,000) The thought that crosses my mind is that they are manipulating the PM and anyone that purchases them are playing right into the trap. I’m still an accumulator, but I don’t like to rule out any possibilities. Have you ever given any thought to this?
Ed Note: This website is really all about asset acquisition and different strategies.
David Einhorn gave a speech to a bunch of wealthy investors at the Value Investing Congress on Oct. 19, and said that investors should have some gold, and that he is now buying it, because governments will create far too much money. He doesn’t like the dollar, euro, and especially the yen. He is of the opinion that any, or all, of them could go down fast. He said that the Japanese situation is especially dangerous. You can find the speech at ‘gurufocus.com & probably elsewhere. He sugarcoats nothing! He is one very smart guy who made many millions and wrote a Lehman book. He said on CNBC TV that he would give all the profit from the book to charity. Every investor should read his profound speech.