China Fears Devaluation of U.S. Dollar

Treasury Secretary Geithner will be traveling to China this week to discuss the U.S. government's extraordinary deficit and debt position. The Chinese government has been strongly expressing concerns this year about Congress' and the Obama Administration's fiscal and monetary excess eventually leading to a devaluing of the U.S. dollar.

China is concerned that their U.S. dollar foreign reserves (about $1 trillion) will lose value as the U.S. government increases the national debt and the Federal Reserve finances it by buying up Treasury bonds that the private sector won't buy.

Dollar devaluation will increase inflation and boost the price of gold much higher.

China is likely to eventually reduce its exposure to U.S. Treasury bonds by using their largely U.S. dollar denominated foreign reserves to acquire competitors abroad through state-owned enterprises.

A recent CNBC interview provides a cogent and educational analysis from Martin Hennecke, Associate Director at Tyche Group, on why the price of gold is going to rise due to higher inflation. This interview was recorded at CNBC on Thursday, May 28, 2009.

Here are a couple of excerpts from the interview:

"The banking crisis, the subprime crisis, hasn't been fixed at all, just simply transferred the problems from the banks to the books of the governments, especially in the Western countries. And now this is why the Federal Reserve has to raise, and the U.S. government has to raise such insane amounts of money --- 1.8 trillion dollars, is likely to be the deficit for this year. That's just the lower estimate, even Obama's government came out saying that [they] likely have to revise this due to the unemployment figures..."

"Inflation is going to increase very substantially as a result of all this money printing as they can't really raise all these funds that they need to raise for the bailouts and they will have to print substantial amounts of debt. Quantitative easing will get worse. As you have said, the Chinese are getting extremely nervous of this. We just had a projection from [the] Dallas Federal Reserve President, saying that the unfunded liabilities of the pension and healthcare in the U.S. is $99 trillion. So inflation is going to be a major issue going forward, so even for cautious investors, they need to invest just to protect their wealth. Gold definitely is one of the asset classes we like..."

Good luck to us all,

The Gold Stock Strategist