I’ve often come out with bold forecasts and have been told I’m nuts. I’ve been scoffed at by most other analysts and certainly those from Wall Street or those with any other traditional financial background.Like when I predicted, way back at the end of 1999, that gold would soar from the $260 level to well over $1,000 an ounce in the years ahead.Or when, in the year 2000, I forecast that the U.S. dollar was entering more than a decade of a deep bear market that would eventually see the currency lose its world reserve status.Or when, in August 2004, I warned about the world’s brewing shortages in water, or “blue gold.” Or in January 2005, when I first foretold of skyrocketing food prices. Or when I forecast in 2006 that oil would hit $150 a barrel within a couple of years.
Then there were my repeated forecasts throughout the middle years of this past decade that China’s economy would roar like no other in the history of the world, and that Asian emerging markets would not be far behind it.
It’s ok with me if people think I’m crazy. Even when my close colleagues say so. Because the fact of the matter is that I’ve been right as rain … I’ve given my readers tons of opportunities to make boatloads of money …
And my Real Wealth Report is highly ranked based on its track record among all the financial newsletters monitored by the respected Hulbert Financial Digest.
I tell you all this not to boast, but to urge you to take my top forecast for 2011 very, very seriously. Yes, it’s out-of-the-box thinking again. No one else I know is talking about it.
And yet it’s so darn obvious to me, that if one does not position their portfolio accordingly, they are almost certain to suffer huge losses.
China is preparing right now
to revalue its currency higher,
and to help Washington
push the dollar lower.
Just connect the dots …
Inflation is surging in China, at more than 5%. Food inflation is roaring even higher, at an estimated 8%.
Interest rate and bank reserve requirement hikes have not quelled inflation.
Beijing does not want to restrict credit or tighten it much further and risk a slowing economy.
Beijing is already taking steps to internationalize its currency. The yuan is being officially traded in Hong Kong, Malaysia, and other countries.
Beijing just recently cut a deal with Russia to do inter-country trading in yuan. China is issuing bonds outside of its borders in yuan. All steps to prepare to revalue the yuan higher.
Beijing is buying gold, lots of it. In London and Switzerland. But it’s having trouble getting its hands on enough of the precious yellow metal.
It wants to amass plenty of gold to effectively back the yuan, just like the Swiss once did with the franc, and to make sure when the yuan becomes a major currency, that it will be less prone to the fluctuations of most other fiat currencies.
China also wants enough gold to insulate its currency and balance sheet from the impact of the inevitable demise of the U.S. dollar as the world’s reserve currency.
The big problem is that …
Beijing is simply not going to kowtow
to Washington’s political demands to
revalue the yuan higher — and the dollar
lower — without concessions!
Anyone who’s spent anytime living and working with the Chinese know how they operate. They are very savvy, street smart, secretive, and very much embrace the Asian cultural avoidance of “losing face.”
So as much as Beijing does need to revalue its currency higher now, to help tame inflation, to reduce rising food prices, and to give its 1.3 billion citizens more purchasing power — Beijing is simply not going to act (and also give Washington what it wants, a lower dollar) — unless it gets some concessions from Washington that it’s satisfied with.
There are two major concessions Beijing wants …
1. More gold! And the most liquid, deliverable gold market in the world is in New York.
So Washington is going to cut some slack for Beijing, and let them soon go into the New York market and start buying up loads of gold.
All Washington has to do is make a few private phone calls to U.S. regulatory authorities and China can start buying.
Of course, it will be a back-door deal, and Beijing’s traders will be instructed to keep a lid on it (or face a firing squad), and the same pressure will be put on brokers in New York.
But if you think Washington doesn’t have the capability of making such a deal, think again. They’ve made all sorts of clandestine deals over the last few years during this financial crisis.
And if you think China can’t keep its gold buying in New York quiet, think again. In the mid-1980s, the former Soviet Union was selling huge amounts of gold in New York and it took more than three years before it became public.
2. Beijing also wants to preserve its stranglehold on rare earth metals ― without interference from Washington. China controls 95% of the world’s supply of rare earth metals, a huge strategic advantage. And, Beijing just cut its exports of rare metals by 35%.
Washington does not like that one bit. BUT, Washington is already starting to back off on China’s rare earth metals policies. Why? It’s an additional incentive Washington is going to give Beijing to coax it to push the yuan higher, and the dollar lower.
Best I can tell, I’m not aware of anyone who’s caught on to all this in the states yet. But I assure you, it’s already under way.
Bottom line: I believe we are
going to see the yuan revalued
substantially higher, in two or three
stages, throughout this year.
What are the consequences?
First, as the yuan starts to increase in value, U.S. financial markets will be rattled. It will remind investors of when the Japanese yen was pushed higher, and the dollar lower, between 1985 and 1987, setting off the Crash of ‘87.
So most investors, wrongly, will start dumping stocks and natural resources. It will add fuel to the fire of a much-needed pullback that should occur anyway.
Investors who are overly bullish in precious metals and other natural resources will get clobbered, and start panicking and selling. Ditto for stock investors.
But oh, how wrong they will be!
Second, once the dust settles, nearly all markets (except U.S. debt markets, municipal and federal debt obligations) will come ROARING back!
Why? Because they’ll start to realize that …
A. A higher yuan also means a LOWER dollar.
B. China is buying gold!
C. The whole operation was exactly what both Washington and Beijing truly wanted …
For Beijing to export some inflation
to the U.S. … and for the U.S. to
export some deflation to China!
That’s exactly what the code-speak from Obama, Geithner and Bernanke is all about when they toss around the phrase “rebalancing the global economy.”
It’s all about devaluing the U.S. dollar … stirring up inflation in the U.S. … and giving China’s consumers a stronger currency so that they can purchase more with less threat of inflation to their economy (and more to ours).
Will it work? Will it help solve the great financial crisis the U.S. is experiencing?
No, not by a long shot. It will, however, buy some time for the U.S.
But in the end, it will simply accelerate the decline of the U.S. dollar as the world’s reserve currency … threaten the U.S. with out-of-control inflation … and set in motion a new phase of this crisis, where ultimately, a new global monetary system will be needed.
Steps you need to take NOW …
First, do not be overly exposed to U.S. broad stock markets right now. I suggest getting out of everything except the best, core holdings of natural resource stocks and precious metals miners.
For those, I would hedge up, using an inverse ETF fund, such as the PowerShares DB Gold Short ETN (DGZ). Do not misinterpret: Once a normal, healthy pullback in precious metals is over (it’s already started), gold and other precious metals will soar to unbelievable new highs.
Second, continue to steer clear of all U.S. municipal and federal debt obligations. They are a disaster in the making.
Third, I recommend investing a portion of your cash in the Market Vectors Chinese Renminbi/USD ETN (CNY), an exchange traded note that trades on the NYSE and gives you exposure to a strengthening Chinese yuan.
Best wishes,
Larry
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