-- Posted 12 January, 2011 | | Discuss This Article - Comments:

China's monetary policy is increasingly a main driver of gold and silver prices because so many Chinese can now afford metal investments and are willing to snap them up. 

Recently, though, China took one of the most aggressive steps to take control of the 2011 silver supply.  This year, China anticipates it will allow its currency to advance some 5% against the dollar after previously allowing for only a 3.6% advance in 2010.  Such a massive increase, many believe, could tip the metals scale.

Why the Currency Matters

As the Chinese newspaper that first published the report admitted, any increase in the value of the yuan is a de facto decrease in commodities prices.  Thus, each 5% uptick in the Renminbi is the inverse decrease of 4.77% in actual commodity prices.  In addition, if the trend continues, that would imply that ordinary investors and speculators, alongside collectors and savers, would drive rising demand – and rising prices.

Through the first three quarters of 2010, Chinese silver exports were effectively shut off, nose diving by nearly 60%, indicative of a shifting preference for hard assets.  Gold exports were nulled, and in fact, the balance turned further to the side of imports, with gold imports advancing some 500% through October.  That shift, many believe, is here to stay and will not stagnate, but instead see future growth as China's purchasing power rises.

Monetary Irony

The fact of the matter is simple: both the United States, and by some measures, China, are inflating their currencies to their limits.  In the United States, we've seen two quantitative easing programs on top of zero interest rate policy for many years, both pre- and post-financial crisis. 

In China, the excess capital derived from their massive export economy is affecting domestic inflation, but is also paving the way for a rising middle class (consumption), and possessing such an undervalued currency leaves open the ability to revalue the Renminbi without cooling their own growth.

The difference between these two countries, though, is that China can afford to both inflate its currency and yet still allow it to rise against the US dollar, giving it a very privileged entrance into the pool for commodities that hasn't been seen since the United States, in a military agreement with Saudi Arabia, cornered the market for oil.

Mainstream Getting Behind the Movement

The mainstream media is increasingly bullish on commodities, particularly monetary metals, in an absolute reversal from their 2009-2010 headlines and hit pieces. 

While some in the media are still pointing the finger towards a bubble, there really isn't much bubble to be found.  Even without hyperinflation or vast changes in currency values, there will be, in the next many years to come, billions of people lifted from poverty to wealth and productivity. 

What happens when these people, many of whom have experienced (relative) conditions much like the United States' “Greatest Generation,” decides to invest?  They're going to seek safe haven investments, and there is no better safe haven than the limited stores of precious metals. 

Dr. Jeffrey Lewis

www.silver-coin-investor.com