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Catching a Falling Financial Knife

Chinese Yaun to Take First Place from U.S. Dollar

Currencies / China Currency Yuan Feb 19, 2013 - 04:23 PM GMT

By: Ned_W_Schmidt

Currencies

Our headline came from the T-shirt of a young soccer player. Her opinion of coming in second in a tournament was quite clear. For her, getting a trophy for second place was the equivalent of getting the trophy for first loser. In soccer, no one wants to win second place. Same is true for currencies as being ranked in second place is indeed acknowledging one has become first loser.


"China Passes U.S. to Become World's Biggest Trading Nation"

Above was the title of a recent news article that carries a clear message for investors.(Bloomberg, 9 February) Last year U.S. total international trade, imports and exports, was $3.82 trillion while China's was $3.87 trillion. In terms of trade, China is now in first place, and the U.S. is now first loser. Those roles are not going to be reversed. China's dominance of global trade is both acknowledged and expected to continue to grow.

Two events ended the dominance of the British pound as the global currency. Those events led to the dominance of the U.S. dollar as a reserve currency. One was that the U.S. became the world's creditor during World War I. Second was the rise of the U.S. to dominate world trade. When one nation dominates both world trade and the world's credit system, the rest of the world has really little choice. They had to use the U.S. dollar for trade and to repay debts.

The same set of circumstances is now in place with China. China has become the banker for the U.S. just as the U.S. did for Great Britain, as it was losing the great part of its names. The Renminbi is now going on to be the winner, and the U.S. dollar is now first loser.

Schmidt Median US Dollar Index

In the chart above of our measure of the U.S. dollar's value note that the dollar has traded down to a lateral move that has been developing for several months. That pattern is now a support level, or resistance level. It is readily evident in the currency markets as little change has occurred. Investors should remember that all persistent resistance levels, support or over head, are taken out with a vengeance. That is likely to be the case with U.S. dollar in the months ahead.

Other factors are also adding support to the Renminbi's bright future and dollar's

dreary outlook. The U.S. has taken no, repeat no, action to restrain the Obama deficits. The so called spending sequester of the U.S. government is not a spending cut. It is a reduction in the rise of spending. U.S. government spending will continue to increase, relying on China for financing. When will the U.S. government be forced to issue Renminbi denominated bonds to finance the Obama deficit?

Additionally, China fosters success and encourages prosperity. In the U.S. the Obama Regime is determined to confiscate as much income and wealth as possible. Could China someday be a better place for wealth to reside than in the U.S.? Has it already become so?

North American investors, as well as those in the EU, really have only two good investment choices today. One is to buy Gold. As we sent out an important message on buy signals this week to readers we are not today including a graph of Gold and our indicator.

Second choice is Renminbi denominated bank deposits, and some other Renminbi denominated investments. Chart below portrays the performance of the Renminbi in U.S. dollars over the past two years. While we do not expect the Renminbi to appreciate dramatically in the short-term, the long-term potential is extremely attractive. Think of it as the tortoise in the great investment race of the future against the imaginary hares.

US$ vs Renminbi

By Ned W Schmidt CFA, CEBS

Copyright © 2011 Ned W. Schmidt - All Rights Reserved

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. To receive copies of recent reports, go to www.valueviewgoldreport.com

Ned W Schmidt Archive

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Catching a Falling Financial Knife