The Golden Yuan Is Coming – Here's How to Play It

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The U.S. dollar has been the world's de facto reserve currency for almost 90 years.

But this financial dominance may be nearing its end.

In recent years, China's been floating the idea the yuan should take on the dollar's role as the world's reserve currency.

In fact, the Chinese have already negotiated numerous bilateral trade deals that completely bypass it.

And they've even called for efforts to "de-Americanize" the global economy.

Whatever happens, China's economic rise foreshadows increased influence.

It's a trend that not only has serious implications, but also great profit opportunities, if you know what to expect…

A (Very) Brief History of Reserve Currencies

Along with reserve currency status come the roles of financing international trade and acting as a store of value for governments worldwide.

When we look back over the past 500 to 600 years of reserve currencies, an interesting pattern emerges.

Currencies

As this chart shows, since the mid-1400s, there have been six different reserve currencies.

Tied for the shortest lifespan are Portugal and the Netherlands at 75 years, while the longest tenures are Spain and the UK, both at 110 years.

The average has been about 95 years… and the U.S. dollar has presided for the past 88 years.

As you can see, reserve currencies come and go. It's not a question of if, but when. And it appears the greenback's dominance has reached its twilight.

Until 1971, when Nixon closed the "gold window," overseas dollars were backed by gold. That meant foreign governments could redeem their American dollars for gold at $35 per ounce. 

But the 1950s and 1960s saw ballooning deficits, inflation, and swelling debt from welfare and warfare as America's share of the world economy shrank.

So Kissinger and Nixon hatched the petrodollar system, whereby the United States would provide political and security support to Saudi Arabia's royal family. In exchange, all oil deals would have to be transacted exclusively in dollars, and the House of Saud would buy lots of Treasurys with their greenbacks.

In effect, this guaranteed a constant and elevated (though artificial) demand for U.S. dollars worldwide.

But still, using the unbacked dollar as a world reserve currency is a massive experiment in fiat money. 

It's never been tried before… and it's unlikely to end well.

The Emerging Yuan

In the past few years China established a string of currency swaps with other nations to settle trade, bypassing the dollar completely.

The goal is to help internationalize the yuan by gradually growing its level of acceptance. It's working.

On Dec. 4, 2013, the Wall Street Journal reported that China's growing slice of the world's economic pie saw the yuan overtake the euro and yen in trade finance.

According to the Journal, "That made the yuan the second-most used currency in trade finance but still well behind the U.S. dollar, which backs 81% of trade finance." The yuan now accounts for 8.7%, but it's gaining quickly.

In October, China announced a 350 billion yuan ($60 billion) swap for euros with the European Central Bank. That ranks second only to its previously established 360 billion yuan swap line with South Korea. There's even a 400 billion yuan agreement in place with Hong Kong.

There are as many as 25 such swap agreements in place with various nations, estimated to be worth nearly $1 trillion. Corporate debt issued in yuan has nearly doubled in the past couple of years to around $50 billion.

So clearly, the yuan is being readied for internationalization.

China's central bank has stated the yuan would become "basically convertible" by 2015.

But what the yuan may look like before trading freely is what's most intriguing.

Join the conversation. Click here to jump to comments…

About the Author

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.

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  1. Alice Parsons | January 21, 2014

    What are the action items here? I saw all this on a video presentation last night but no actions either that are anything different, What am I missing?

    • Deacon | January 21, 2014

      Here's one action item from the article (the capitalization is mine):
      "I'm a big believer in the strengthening of gold, and my suggestion is to BUY MORE OF IT… the bull market is far from over".

    • Mark Volcheff | January 21, 2014

      Agree with you Alice. This financial "teasing" drives me crazy. Fully understand they typically want to hook you into buying some sort of annual financial news service, but they did not do that here. So author Peter Krauth, you've thrown out the scare and the "chum", and buy gold is your advice, that's it??

  2. Po | January 21, 2014

    How and where would I buy yuan in USA

  3. Bruce Stead | January 21, 2014

    I would like to know whether to buy gold, bitcoin, or yuan ? I also believe that the value ot the dollar is going to be drastically reduced in the very near future and I should use some of my paper money to buy something that will be more valuable in the future. Please let me know what you would recommend. Thanks, Bruce

    • Alan | January 26, 2014

      Buy gold, Bitcoin will fail, The Yaun is no good at this point. Gold is down, the markets are turning bearish. Gold should see a large value increase in 2014. Consider it being at $1800 an ounce, now at $1200. It's the safest play in my opinion.

  4. Jeff P. in Canada | January 21, 2014

    When the European banks were having big troubles 3 or 4 years ago, the U.S. Fed offered to bail them out, which it did by printing a bunch of bucks to give to them. In exchange, the Fed made them agree to settle all inter-bank transactions in USDs. I think that that was a genius move on the part of the Fed. It has at least delayed the replacement of the USD, as de-facto international reserve currency, by any other currency. I believe that you are right though, that the Chinese yuan will eventually become the next de-facto international reserve currency. But it will probbly take longer than what we would all hope for.

  5. C Foreman | January 21, 2014

    Which is the best way to play it? CNY or CYB>

  6. Joe D | January 21, 2014

    Well ? "How to play it" ? No real options stated

  7. George Holloway | January 21, 2014

    I read through the article twice and am still looking for the "ways to play the golden yuan." What did I miss?

  8. Robert in Vancouver | January 21, 2014

    I think the way to play this is to buy gold, silver, and oil.

    Or buy profitable companies in stable countries that produce those commodities.

    Or buy commodity backed currencies in stable countries such as Canadian dollar and Australian dollar.

  9. David | January 22, 2014

    Most sensible people see the USA and the Uk's debts as fatal in the long term as the Politicians have got there heads totally stuck in the sand. So there is no doubt that given time China will takeover as the Yuan become the world reserve currency in not too many years time. Unless of course our politicians gat their fingers out of their backsides and remove their pig like snouts from the trough.

  10. GF | January 22, 2014

    I'm sure there's a reason why the way to invest in the Yuan hasn't been mentioned.
    Could it be that the writer and his buddies are getting in their positions first
    before they want to promote it for others to jump in?

  11. frank | January 22, 2014

    The new currencies could be commodities which largely affect the volatility of the legitimate currencies The ability print money means that the actual value in terms of buying power must be comromised One would expect greater volatility in currency's in the future frank

  12. bobl | January 22, 2014

    A teaser but no follow through, very bad

  13. Alex | January 22, 2014

    The movie "Last Man Standing" comes to mind… in a world run and rigged by central bankers who aren't answerable to any elected officials [see the shocking Bernanke/Coleman interview by Rep Alan Grayson on YT]… and globally connected, as evidenced by the appointment of CB of Israel's Stanley Fischer as Yellen's co-chair.

  14. Daniel Martinez | January 22, 2014

    Those guys think they are so slick to get your money first…
    Buy the US ETF for the Yuan….ticker DSUM, it pays 3.3% div
    Good luck
    Daniel Martinez

  15. H. Craig Bradley | January 22, 2014

    RESERVE CURRENCIES A CONFIDENCE CONTEST

    Central Banks do manipulate the price of gold by their co-ordinated selling and buying. It moves markets. There is no way that any single global currency, U.S. Dollar or otherwise, in today's global economy can be fully backed by gold. If it does not say "redeemable" in gold or silver then it won't be the same as when our dollar once was. My guess is if our monetary policies continue to cast doubt on the U.S. Government and our fiscal policies, then confidence in the dollar might plummet.

    The Chinese yuan would then be relatively more desirable (valuable) if it gathers greater relative confidence in global currency markets. I would expect the Chinese government to partially back its expanding currency with gold. By managing perceptions and public confidence, they could take away from the dollar on FX Exchanges. It could get harder, possibly much harder, for the Federal Government to deficit spend and Treasuries might have much higher interest rates when they do.

  16. H. Craig Bradley | January 22, 2014

    CRYSTAL BALLING

    The end result of a sizable shift away from the U.S. dollar in future years would be higher import costs, higher inflation, higher interest rates on Treasuries (bonds) and possibly a bond market crisis of some sort. The Federal budget would become stressed if interest payments balloon. The stock, bond, and housing markets would tank and money would leave the country as fast as it is currently coming in, all things being equal. More volatility and risk in every asset class during the transition period for sure. I don't think the next global reserve currency will be issued by a single country ever again. Instead, expect a group of nations or a group of regional countries to float their own or combine like Europe. Alternatively, a "basket of currencies" ( including the U.S. Dollar) might become the basis of the next global financial construct.

  17. Ed | January 22, 2014

    Here it is how to play it…..
    Shows nothing…
    Google it
    Hate these teasers…
    But we do need to Buy more of it and less dollars

    • Daniel Martinez | January 23, 2014

      Ed..you didn't read my post….the ticker symbol is DSUN

      • Daniel Martinez | January 24, 2014

        DSUM

        • Ira Spondre | January 25, 2014

          Dan, your absolutely correct. DSUM is the way to play it. Have been buying it up in droves. In 1 to 2 years expect a 3 or 4 bagger (300% to 400% return)!!

  18. yngso | January 23, 2014

    Thanks, Daniel, and what about gold, GDX or what?

  19. Money_May | January 24, 2014

    People keep writing that the article is a teaser. I don't understand what's a tease about it. Do you want Peter to give you the money to buy Yuan and Gold, good grief!

  20. Miguel_G | January 25, 2014

    With China a currency manipulator, would the yuan as the world's reserve currency have an impact on its ability to do so? I presume it would but am curious and it would in the least serve the purpose of further de-Americanization of the global economy. Interesting, and interesting given China's slowed growth recently whether this macro development will accelerate.

  21. PETER MACLEAN | January 25, 2014

    I agree with all the comments about the lack of action items. If you handed in this essay to a high school teacher , I doubt you would receive a passing grade, It is an incomplete essay

  22. Zen | October 22, 2014

    "Here's How to Play It" Did I miss that part?

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