Category: Global Finance
China finally updated their official gold holdings on Friday, revealing a 57% increase from the previously reported figure, but less than what most analysts were expecting to see. China’s gold reserves totaled 1,658 tonnes at the end of June of this year, up from 1,054 tonnes reported in April 2009. Bloomberg had previously estimated their holdings could be as high as 3,510 metric tonnes based on trade data. While disappointing to many gold investors, the spot price of gold declined only slightly on Friday.
Although the release was welcomed, as many have been eagerly awaiting an update to China’s data, it may have raised more questions than it answered. For example, China had been “releasing” data previously, but reports showed no change in the gold reserves every single month for six years. Therefore, the data was false. According to their official release, it now looks like China increased their gold reserves by 600 tonnes in one month, which cannot be true as the spot price of gold could not have declined as it did with that much buying.
Last month we wrote about the Chinese stock market bubble that was being inflated, largely by delusional retail investors and easy access to margin and debt. But it wasn’t as if something was in the water – Chinese Mom-and-Pop investors were being egged on by their government to invest in the market as the central planners tried to juice economic statistics, bail-out heavily indebted state-owned firms and turn attention away from the sagging real estate market.
Unsurprisingly, the government-fueled rally is coming to an end as both the Shanghai and Shenzhen Indices have crashed over 30% in less than one month! Approximately $3.9 trillion has been wiped out, more than the total annual output of Germany and 16 times Greece’s GDP, to put it in perspective.
Over 1,400 Chinese companies have suspended trading, which is almost 50% of the market. Some of this is due to stocks hitting maximum daily decline limits imposed by the exchange, but much is due to the companies themselves halting trading. This is because these companies were using their own corporate stock to collateralize or secure loans from banks.
A correction of 30% would actually be somewhat normal and healthy in any market that has
Greece continues to face a potential default by the end of this month, prompting many Greek citizens to withdraw their savings from banks. This in turn has led to intensified calls for capital controls. Capital controls are seen as a necessary action by many banks and government finance ministers. However, they are not a solution to the underlying problem and will only create more distortions and economic problems the longer they remain in place.
Greece’s IMF repayment is due by the end of this month, and if a deal with their creditors is not reached they will likely default. The possibility of default or removal from the Eurozone has caused many Greek citizens to withdraw their savings for fear of bank closures or currency devaluations.
The Federal Reserve and FOMC concluded their two day meeting on Wednesday and announced they would be keeping interest rates near zero. This was expected, of course. What is causing anxiety for market participants is the continued question of when the rate hike cycle will actually start. Today’s decision continues to drag out the anticipation and fuel the debate. In this article, we will first look at the facts of today’s announcement and then analyze the options the Fed is currently facing and the implications for the markets.
Although a rate hike was technically possible, almost all pundits and economists knew that was not going to happen. Instead, the main focus was on any indications by Fed chairwoman Janet Yellen concerning when or if rate hikes would be coming later this year. In this regard, it seems the Fed
Zimbabwe is infamous for its hyperinflated currency, with its citizens carting wheelbarrows full of money to the market just to buy a loaf of bread. The country’s hyperinflation hit a peak in 2008, reaching 5 billion percent, making the Zimbabwean dollar virtually worthless. After that, citizens began using foreign currencies, such as the U.S. dollar and the South African rand.
Now, the Zimbabwean government is finally ditching the currency, offering a deal to citizens in which they can convert their bank account balances to USD. Accounts with balances up to 175 quadrillion Zimbabwean dollars will receive USD$5; accounts in excess of 175 quadrillion Zimbabwean dollars can convert their money to USD at an exchange rate of USD$1 for 35 quadrillion Zimbabwean dollars. People who still hold old Zimbabwean dollar notes can exchange 250 trillion old notes for USD$1.
Zimbabwe’s disastrous hyperinflation is a textbook example of the dangers involved with using fiat currency. Granted, Zimbabwe’s monetary horror story occurred because of extremely irresponsible policies that are not present in the developed world. However, strong currencies like the US dollar are not very different from the Zimbabwe dollar in terms of fundamentals. Both currencies are managed by a central bank and can be printed at will, with no restriction on supply. The only real differences between the two currencies are that the Federal Reserve is better at managing its money supply, and the political climate in the U.S. is much more stable than in Zimbabwe. But those two things could change at any time, placing the U.S. in a similar situation to Zimbabwe.
The only way to guarantee a reliable currency is to completely get rid of central control over money. Arguably, the best way to accomplish this goal is by adopting a currency with a limited supply, as well as preventing banks from issuing money substitutes in excess of real cash. That way, the money supply cannot grow beyond the amount of cash the banks have in reserves. Under such a system, not only would it be impossible for banks and government to create destructive inflation, but volatile business cycles would likely be prevented as well.
Historically, “sound money” has been synonymous with gold. However, as modern technology progresses, the market has produced potential alternatives to gold. Zimbabwe’s move to the United States dollar will undoubtedly be a welcome change for the country’s economy. However, Zimbabweans should understand that the USD is not fundamentally different from their own failed experiment with fiat currency. In the future, they should seriously consider a sound money alternative to fiat currency.