China holds over 2 trillion US$ in foreign reserves of which about 700billion US$ is invested in US$ Treasury Notes, which earn interest but are losing value with the falling US$. China also holds over 1000 tonnes of gold which costs money to store but at least is going up in value to over USD 1000 an ounce.
I understand that a lot of China’s gold is stored in London but that it is pulling at least some of it back to start storing it in Hong Kong. The other worrying development for the US is that China is to allow its citizens to hold gold.
These developments are good for Australia because we dig up lots of the yellow metal (about 10% of the world’s supply) and production has started to rise again (up 2 tonnes in last quarter) with new mines still coming on stream (Boddington the largest with expected annual production of approx.7 tonnes rising to 30tonnes) but not so good for America because interest rates in the US will have to rise to make their Treasury Notes (TN’s) more attractive. If they do rise in the US (they already are rising at the long end) then there will be less pressure on our dollar and on our interest rates.
The Australian Reserve Bank knows that if it increases Australian interest rates (already high by international comparison) our currency will become more attractive to foreign investors who will want to buy more AUD which will rise and make our exports less competitive and lead to job losses.
If rates in the US do rise to make TN’s more attractive, the US$, which has already lost 12% of its value in the last year compared to the Chinese yuan, may slow its slide.
US GDP in 2008 was approx US14 trillion (vs Australia’s USD 1 trillion) but its national debt is now fast approaching US$ 12 trillion (vs Australia’s nominal Federal government debt), rising by over US$ 100 billion every month at a time when President Obama wants to introduce free healthcare to those who can’t afford to pay while still fighting wars in Iraq & Afghanistan. On the other hand the capacity of industry and the well-off to pay higher taxes has reduced, if anything. How is the deficit going to reduce? I can’t see it happening unless the US$ falls dramatically to make their exports much more competitive so that incomes rise again, tax receipts rise and deficits start to fall.
In short, I think US interest rates will rise before ours do. Let’s see if I’m right. If I am, the Cronulla property market will be perfectly placed, new quality developments such as Sammut developers Drift apartments on Gerrale St, Cronulla (Central) will come on the market as a luxury finished product at the end of 2009, while interest rates are low and the Australian economy strengthens…
Henk Emans, B. Comm, MBA, LREA