Last week in PROFIT CONFIDENTIAL, I presented the facts as to why China would continue to be the largest gold bullion buyer in the world.
The basis of this argument stemmed from China’s desire to see its currency, the yuan (sometimes referred to as the renminbi), be an international currency on par with the U.S. dollar and the euro. Since China only had a fraction of the gold bullion reserves that both the U.S. and Europe had, it was only natural that China would be a huge buyer of gold bullion in the marketplace if expanding the use of the yuan was its goal.
More proof has presented itself that China is taking the necessary steps, in a slow and methodical way, to get the yuan to become an international currency.
At the end of this month, China will sign an agreement with India,South Africa,Brazil, and Russia to offer yuan-based loans in dealings with these countries, instead of U.S.-dollar-based loans.
These countries will agree that, for their international trade and cross-border lending, they will use the yuan instead of the U.S. dollar.China’s stated goal is to have the yuan go from 13% of all transactions between these countries to 50% of all transactions by 2015.
China is not stopping there when it comes to the yuan. It recently signed a loan agreement with Venezuela for $30.0 billion—the loan was denominated in yuan instead of U.S. dollars.
There are two immediate conclusions to this yuan news.
First, there can be no doubt that China will continue to be the largest buyer of gold bullion. Both the U.S.and Europe have enough gold bullion with which to back their currencies. China has just 14% of the gold bullion that the U.S.owns and just 11% of what the European Union owns in gold bullion.
The People’s Bank of China has stated consistently that it views gold bullion as the only true currency in the world—even against the yuan—which means that China is scouring the world for gold bullion.
Secondly, it means that the Chinese economy and the Chinese companies will continue to be the future generators of growth going forward. One need only look to U.S. international companies and see what an international currency has meant for them in terms of expanding trade with countries worldwide and so providing great returns for their shareholders back home in the U.S.
The stars are aligned for Chinese companies to experience this same type of growth going forward, as the yuan becomes used by more and more countries around the world.
You have to give the Chinese credit. They don’t just talk about how they will make the yuan an international currency; they back it up with action. This means that, in spite of China not reporting how much gold bullion it has,China’s population and the People’s Bank of China will continue to be the largest source of demand in the gold bullion market.
For investors like you and me, softness in the price of gold bullion and quality gold stocks should be seen as an opportunity.
The unemployment rate in Europe is at its highest level since the inception of the euro.
This is not the type of statistic the 17 members of the European Union had in mind when they decided to share a currency. Here is what the unemployment rate trend is looking like throughout the European Union…and it is not encouraging:
December 2011: 10.4%
January 2012: 10.6%
February 2012: 10.7%
(Source: European Central Bank)
That 0.1% difference between January and February represents roughly 185,000 people, so it is by no means an insignificant number. Once again, records are being broken, but for all the wrong reasons.
Spain, which I’ve been writing about in these pages, is fighting back against the European Central Bank (ECB). The country refuses to go along with the budget deficit targets set by the ECB—it is no wonder with their unemployment rate now sitting at 23.3% as of February.
Italy’s unemployment rate soared to an 11-year high of 9.2%.Greece’s unemployment rate continues to rise, hitting a high of 19.9% and counting. Both Ireland and Portugal saw their unemployment rates climbing higher, with both reaching 14.4%.
As Ireland’s unemployment rate continues to rise and voters go to the polls in the next few months to decide if they are going to implement austerity measures from the ECB, what, dear reader, do you believe the voters will decide?
The good news is that Austria’s unemployment rate continued to be a true bright spot in an otherwise dreary landscape; its unemployment rate remained at just four percent.Germany’s unemployment rate worsen somewhat, but still came in at a very respectable 5.8%.
The numbers I list below are horrifying. Here are some of the worst youth unemployment rates (ages 16-24) across the European Union as of January 2012, except where noted:
Greece: 51.1% (as of December 2011)
Mostly Germany, but to some extent Franceas well, has been pushing austerity measure laws throughout the ECB for all of its 17-member nations. They have held countless summits in order to develop and discuss the laws.
But where is the summit to discuss youth unemployment and the deteriorating unemployment rates among the youth of Europe? Where is the summit to discuss the rising unemployment rates across southern Europe?
I was the first economist I know who said in early January that the European Union was in a recession. The economic numbers are accelerating to the downside, which means that the “mild” recession that is being talked about is going to be just that: talk. The truth is that the recession is worsening in the European Union.
Watch out for the complacency in the markets—and be suspicious of their recent rise. There are serious structural problems in the world that are not being dealt with, dear reader.
Where the Market Stands; Where it’s Headed:
They were dancing on Wall Street last night! After the trillions of dollars by which the U.S. government has increased its debt, after the trillions of dollars by which the Fed has increased the size of its balance sheet, the stock market hit a high yesterday not seen since 2007.
Wall Street finally got what it wanted, a strong breakout for stocks on the upside—a surefire way to lure even more investors back into the stock market. This is exactly what the bear market rally is supposed to do—bring more suckers in before their money is taken away again.
What He Said:
“If I had to pick one stock exchange that would rank as the best performer of 2007, it would be the TSX (Canada’s equivalent of the NYSE). Interest rates in Canada remain very low and they are not expected to rise anytime soon. Americans looking to diversify their portfolios, both as a hedge against the U.S. dollar and a play on gold bullion’s price rise, should consider the TSX. Most brokers in the U.S. can buy stock on this exchange.” Michael Lombardi in PROFIT CONFIDENTIAL, February 8, 2007. The TSX was one of the top-performing stock markets in 2007, up just under 20% for the year.