Asia Sentinel:

China’s announcement that it has more than doubled its official gold holdings to over 1,000 tonnes is significant as much for the politics of its timing as for the news itself. Indeed it is only one of several recent announcements made to position China for greater influence as the world financial system faces the prospect of its biggest changes since the 1971 Smithsonian Agreement.

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The dollar may seem fundamentally weak and a poor store of value but it reigns supreme as a transaction currency, particularly in Asia. Even were the yuan to be fully convertible and the all trade permitted to be settled in it, it would take a long time for it to become significant. There was a time when it was believed that the yen would play a major role in Asian trade denomination and settlement. But though it is significant for some of Japan’s exports, particularly to Japanese-owned factories in Southeast Asia, it is not otherwise widely used.

Indeed, East Asia’s years of trade surpluses act against its currencies becoming more international as others have limited opportunity to acquire them. Meanwhile US profligacy has created a huge supply of dollars which lubricates global trade.

Huge US external deficits may be on the wane and Japan and even China may find themselves in external deficit, in which case they may want to finance that by encouraging others to hold their currency. But for now at least that is not the case.

My comment: I do not have a crystal ball but it seems obvious that the US has many structural problems that are going to be politically difficult to deal with and will not allow for a responsible fiscal regime. I am not sure if the dollar will just crash or will just fade away. I do know that we have a demographic problem that is intertwined with an entitlement problem. History has shown that governments will always take the path of least resistance which is to debase their currency. The Chinese know this and are slowly but surely positioning their currency to eventually supplant the dollar as the worlds reserve currency.

John Polomny
The Real Deal