Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Yuan and Gold

Commodities / Gold and Silver 2017 Oct 14, 2017 - 02:18 PM GMT

By: Arkadiusz_Sieron

Commodities

In the previous editions of the Market Overview, we have already analyzed the relationship between gold and some major world currencies, such as the U.S. dollar, the euro, or the Japanese yen. But what is the link between the Chinese yuan (officially: renminbi) and the yellow metal? Let’s check it out.


Chart 1: The USD/CNY exchange rate (red line, right axis) and the price of gold (yellow line, left axis, London P.M. Fix) from January 1981 to September 2017.

 

As one can see in the chart above, there is no clear long-term relationship between the yellow metal and the USD/CNY exchange rate. It is hardly surprising, as the exchange rate of the renminbi was set not by market forces but by the authorities for most of its history. In the beginning (until the 1970s, when the Chinese government started to liberalize the command economy), the yuan was overvalued to support imports and reduce the country’s dependence on imported manufactured goods. However, it was devalued to 8.74 in 1994 to support exports. The Chinese government maintained the peg to the U.S. dollar at about 8.3 until 2005. Although the peg was then lifted, it was reintroduced in 2008 when the financial crisis burst out. It was maintained until 2010, when China returned to the managed floating rate system. So let’s analyze the link between gold and the renminbi since then.

 

Chart 2: The USD/CNY exchange rate (red line, right axis) and the price of gold (yellow line, left axis, London P.M. Fix) from January 2010 to September 2017.

 

The chart above also does not show a clear correlation between these two assets. The yuan appreciated since the removal of the peg to the U.S. dollar in June 2010 until 2014. In that time the price of gold reached its multi-year high and then collapsed. In 2014-2017, the renminbi systematically depreciated against the greenback, but the yellow metal was generally in a sideways trend. In 2017, the USD/CNY exchange rate plunged, which helped the gold prices to rally.

 

However, the decline in the exchange rate was caused by the weakness in the greenback rather than by internal strength in the yuan. As one can see in the chart below, in 2017, the renminbi did not appreciated against the Japanese yen and actually depreciated against the euro.

 

Chart 3: CNY/EUR exchange rate (red line, right axis, weekly averages) and CNY/JPY exchange rate (green line, left axis, weekly averages) from January 2010 to September 2017.

 

The lack of a clear pattern in the gold-yuan relationship does not mean that investors should not pay attention to yuan. First, the international importance of the Chinese currency has been rising recently. In January 2015, the yuan became the fifth most widely traded currency in the world, while in October 2016, it was added to the special drawing rights basket used by the IMF.

 

Moreover, China – which is the world’s biggest oil importer – has recently created a crude oil futures contract which is priced in yuan and convertible into gold. If such an instrument is adopted by oil exporters, the value of gold expressed in the U.S. dollar would likely rise, as the wide adoption of such a contract would lower the petro-demand for the greenback. However, yuan-denominated commodity contracts have been unsuccessful so far, so investors should not count on yuan dethroning the U.S. dollar anytime soon.

 

Second, sharp changes in the exchange rate of the yuan can send shock waves through financial markets, having an effect on gold. As a reminder, in summer of 2015 China devalued the yuan, which pushed global equities lower. Hence, a devaluation of the renminbi would imply an appreciation of the U.S. dollar, which does not sound good for the gold market.

 

However, the revaluation of the renminbi could also significantly affect the markets. This is because China purchases a lot of U.S. Treasuries in order to recycle its huge dollar surpluses (it buys foreign currencies to maintain cheap yuan, which stimulates exports). Hence, sudden sales of the PBOC’s forex reserves would increase the U.S. yields. Higher interest rates are usually negative for the gold prices, but the safe-haven demand for the yellow metal could then increase.

To sum up, despite the rising importance of the renminbi in the world, its link with gold remains rather weak. Although perma bulls believe that the U.S. dollar will collapse soon and the gold-backed yuan will replace it as the world’s reserve currency, gold investors should not investing in the yellow metal, betting on this scenario, as yuan is not as freely floating, liquid and transparent as the greenback.

Thank you.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in