Friday, February 11, 2011

PRC Rate Hikes May Not Be That Bad For Gold

Over at Seeking Alpha, "Hyperinflation" points out that the rate hikes by the People's Bank of China may not be all that bad. The reason he gives, is the need to maintain the renminbi-greenback peg. If the PBoC tightens too much, the Chinese currency will be forced up; that, the PRC doesn't really want.

Even if the peg is broken in a serious way, the result would be pressure on U.S. prices. Instead of exporting inflation, the U.S. would have to face it:
Given the massive increase in the real money supply (that which is immediately available for use in exchange), we have already created an inordinate amount of inflation which has in part been masked by artificially low input costs, as the Chinese have taken inflationary pressures off our hands by accepting a reduction in the purchasing power of the yuan.

So should the yuan begin to de-peg to a meaningful degree, we would see a sharp spike in input costs which would be passed along to the consumer. This would then propel inflation expectations to rise, causing a rise in the demand for an inflation hedge (precious metals)....

Ironic, I know, but the breaking of the peg would lead to a bump-up in the CPI. That bump-up could trigger a new round of gold buying on the assumption that the U.S. is going to be overriden by inflation.

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