USD instability; RMB investment?

[cui ruide]

I'm not very good with economics and certainly do not follow economic issues as closely as I should, so I was hoping someone with a better understanding could address a concern of mine.

I was reading a recent post by Richard on The Peking Duck (here, firewall-hopper needed), which touches on the latest economic policy decision of Ben Bernanke to print some money and risk some inflation. Richard in the post advises buying gold and maybe silver to ward off loss.

What I'm curious about is the path of the RMB. If the USD inflates, is it safe to assume the RMB will appreciate? Or could should we expect the RMB either by natural means or manipulation to roughly follow a course matched to the USD?

That is, should I keep my RMB paycheck in RMB or buy gold?

[gato]

The current inflation rate in the US is at 1% and will likely stay that way for years to come. With the unemployment rate at 10% and 3 million new mortgage foreclosures this year, there's very little chance of high inflation in the near term. The real danger is continued high employment and deflation, which the Fed is trying to combat, unfortunately without the help of Congress.

The US dollar has been steadily rising against most major currencies, except the Japanese Yen. See this chart here: http://www.google.com/finance?q=USDEUR

The price of gold has tripled in the 3-4 years. It's a bubble and probably will burst in due time.

http://www.usagold.com/gold-price.html

Short and Long-term Historic Gold Price Charts

[Stitch]

A few things to consider:

The RMB has for years been pegged to the U.S. dollar, which is to say that as the US dollar appreciates or depreciates, so too should the RMB. There has been a significant push from international governments for China to allow the yuan to appreciate though, and in July, the People's Bank of China formally announced plans to move out of the unofficial peg. However the PBOC announcement stated that any move would be gradual and controlled. Because the RMB can only appreciate against the dollar, it may be a safe bet to keep cash in RMB rather than USD if those two are your only options. As for gold, gato is right, gold is a new bubble, much like the pre-2008 investment in US housing. This bubble is driven by ongoing market instability, and with recent news such as the announcement that US unemployment may increase (from 9.5 to 9.6%) gold may continue to rise a bit longer. Be careful though, as the bubble will burst. Depending on your age, income, and investment goals, you can probably safely allocate some small percentage of your assets in gold, but by all means don't allow gold to be your main investment.

[knadolny]

t's a bubble and probably will burst in due time.

I agree.

As for investing in RMB, a lot of people already do that by buying houses/apartments in Shanghai and Beijing. I would argue the Shanghai property market is a bubble as well. However, the people there are betting the RMB will eventually float and then their property value will appreciate against the dollar. Granted I am not familiar with the details and is more of a gut feeling.

Writing this makes me remember good advice, "only invest in what you understand." If you don't understand something, then you shouldn't put a big bet on it.

[Brian US]

I sold my gold off and hope to sell my silver if it hits $20 an ounce. If you want to take advantage of a country's currency (going up or down) I suggest you purchase stock in that currency. That way you can profit from currency and stock gains. This may not work so well for export countries that lose sales when their currency appreciates.

[roddy]

I can see the logic of moving cash into China, but my issues are a) getting it out again, and B) what to do with it. Property doesn't float my boat, I'm not sure I'd trust China's stock markets, and last time I looked the high-interest savings accounts weren't. I'd rather leave it overseas where I can see things I want to do with it (stock market investments, savings accounts, rolling around in a pile of crisp twenty pound notes).

Gold I've generally been dubious about on the assumption that as the economy pops up gold will duck back down. I'm less sure about that now having done some reading (some article a few weeks back and a recent speech / missive from Jim Slater which should be available easily). But if there's increasing demand from China and India (both retail and industrial), a safe bet of continued market uncertainty, and you buy shares in gold producers rather than actual metal* I can see the sense of it. I might look into that, but you're only meant to invest in things you understand and I'm not sure having played Manic Miner counts.

*Buy an ounce of gold at USD1300. Gold goes up to USD1600, you've made USD300. Buy shares in a gold miner producing gold at cost of USD1000 an ounce under the same circumstances and the profit of the company doubles, and you get a higher percentage increase in the value of the shares. Ripped that right from Jim Slater, but I think I understand it.

[Brian US]

Gold and silver fit safe and snug in a safety deposit box. Unless Franklin D. Roosevelt wants to be present every time you open it :o

http://en.wikipedia.org/wiki/Executive_Order_6102

...Your possession of these proscribed metals and/or your maintenance of a safe deposit box to store them is known by the government from bank and insurance records. Therefore, be advised that your vault box must remain sealed, and may only be opened in the presence of an agent of the Internal Revenue Service.

By lawful order given this day, the President of the United States.

Franklin Roosevelt – March 9, 1933

[rob07]

*Buy an ounce of gold at USD1300. Gold goes up to USD1600, you've made USD300. Buy shares in a gold miner producing gold at cost of USD1000 an ounce under the same circumstances and the profit of the company doubles, and you get a higher percentage increase in the value of the shares. Ripped that right from Jim Slater, but I think I understand it.

On the other hand, if you buy shares in a gold miner producing gold at cost of USD1000 an ounce under the same circumstances, and instead of going up by USD$300, the price of gold goes down by over US$300 (say to $950), the company becomes loss making, if it stays that way it goes broke and you lose everything you invested in the shares. But if you had bought gold at $1300 instead, you wouldn't lose everything, you would still have gold worth $950. That is the trade-off for the chance of a bigger gain, there is also the chance of a bigger loss. What you have to ask yourself is, how much risk am I comfortable with?

You can get the same results borrowing money to buy gold directly. Either way, it is called leverage and magnifies the risks of both gains and losses. Say you use $300 of your own money and borrow $1000 to buy one ounce of gold. If it goes up to $1600, you pay the bank back and still have $600, you've doubled your money. If it goes down to $1000, the bank wants its money back and you've lost all of your investment.

A couple of points on Jim Slater. He certainly understands you can make a lot of money from leveraging, because he has done it himself. But he also understands you can lose a lot of money from leveraging as well, because he has done that too (it was pretty spectacular when Slater Walker went bust). He has been accused in the past of being a bit unethical in the way he has used the media to promote stocks he has invested in, by waxing lyrical about the good points of the investment without mentioning the possible downsides - the point being that if enough people listen to him and buy the stock, it will push up the share price in the short term so he can sell at a profit, and then it won't matter to him if the downsides he knew about but glossed over come to fruition and everyone who listened to him loses money in the long run.

[roddy]

True. I am very easily led. If it hadn't been for that 'Teach in China' poster . . .

[anonymoose]

If it hadn't been for that 'Teach in China' poster . . .

So this whole thing is just the result of a poster? What would have happened had it been a "Teach in Korea" or "Teach in Japan" poster instead?

[gerri]

Anyone read "Surely you are joking, Mr. Feynman," Richard Feynman's autobiography? ... not so OT, considering his description of how he came to study Portuguese instead of Spanish: followed a good looking woman to class, ended here instead of there.

Hey, if I hadn't seen so much Kung Fu or Karate Kid... that's life.

[OneEye]

Sound like why I picked up the trombone. The cute girl across the street played the trombone. She quit the next year, but I ended up going to music school and while there I started studying Chinese. And now here I am, getting ready to move to China next year. :blink: It's all her fault.

[anonymoose]

So was the girl impressed by your instrument, and crucially, did you get to do a duet with her?

[OneEye]

Well, like I said, she quit the following year. I'm sure it had something to do with me.