-- Posted 17 February, 2010 | | Discuss This Article - Comments:

The Chinese have emerged as the new economic superpower, and already investors are beginning to feel the impact of Chinese monetary policy on commodity prices. 

Precious metal investors are questioning how these Chinese policy shifts will impact their holdings.  Thankfully, although a tightening of credit does have an impact on the global monetary supply, China's attempts to call back credit should have little effect on precious metals.

Silver and the Dollar

Both commodities and precious metals are tied to the value of the US dollar.  Silver has always been, and will remain for the unforeseeable future, contingent on the US dollar, as both silver and gold are anti-dollar investments.  

The relationship that commodities share with the value of the dollar has also existed through history.  Oil trades only in US dollars.  In general, the commodity trade is settled in dollars, with most currencies having very little impact on the total global pool of commodities. 

The Chinese currency has even less impact than any other currency due to the fact that it is pegged mostly to the value of the US dollar.  Thus, any changes in the amount of Chinese currency in circulation do not affect its value against silver.

The Chinese: Playing it Smart

Although the markets may have panicked from China's quick move to stifle inflation and a bubbling economy, the longer term picture looks brighter after having removed excess credit from the system.  Purging the system of excess credit, as well as tightening lending standards and requirements, steers the economy away from a bubble, ensuring that China does not experience the same deflationary pop that the US underwent during the credit crunch. 

Investors should applaud China for protecting the true physical economy, even at the cost of slowing the fastest economy in the world.  Precious metals investors should do the same, as China remains a top consumer of commodities and metals primarily for use in its growing manufacturing base. 

A Lone Duck

The European Central Bank is notorious for keeping money supply tight, but China may be considered one of the most protective of all.  Although these two banks may be keen on safer monetary policy, they're lone ducks in a world of inflation machines. 

In sharp contrast, the Federal Reserve, the central bank of the United States, has already allowed for a doubling of the money supply.  The IMF, which represents much of the international community, has borrowed billions to make available to emerging nations, most of which is funded by inflation. 

The simple fact of the matter is that a reduction in credit from one nation, which already ties its currency to the US dollar, has little, if any impact, on long term silver prices.

Invest Without Concern

History shows us that even the greatest of nations eventually succumb to the printing presses.  Whenever and wherever there is a central bank, there is inflation, and wherever there are silver investors, there are profiteers.  What we're seeing today isn't a grand shift in banking policies, just as US interest rates in the 1980's didn't continue on past Volcker.  Truly, riches are reserved for those who can interpret history and profit from inflation.

Dr. Jeffrey Lewis

www.silver-coin-investor.com