Is There A Correlation Between Gold And The Yuan?

“All currencies are substitutes for real money, i.e. gold.  And all governments inflate and destroy their own currencies. Whether gold is priced in yuan, SDRs, or dollars, doesn’t matter. The case for gold is not about price (in any currency). It is about value. Gold is real money and a store of value.”

Presumably, the claim is made in reference to several articles and statements which have appeared in the financial press recently. Among them:

“The correlation between Gold and the USD/CNY exchange rate has become clear recently. I first cited the idea of Gold being pegged in yuan terms in February, based on the increasingly narrow range in the Gold/yuan (or “XAU/CNY”) exchange rate. I emphasized this, given what it means for Gold in that USD/CNY becomes a primary driver of the price of Gold in dollars” -David Brady 

Others, such as Craig Hemke, have made similar comments. And, even the well-respected Jim Rickards has alluded to a similar situation involving the pricing of gold using IMF Special Drawing Rights.

There are extensive explanations, charts, and technical analysis to support the conclusions, so by all means, check them out.

What is ironic, though, is that all of the supporting information actually confirms the consistency of this writer’s contention that gold’s price is “all about the U.S. dollar”.  Dollar up – gold down; dollar down – gold up.

The purpose of this specific article is an attempt to shed a more fundamental and practical light on things. We need to remember that the U. S. dollar is still the world’s reserve currency. Gold is still priced in U.S. dollars. And international trades in gold are settled in U.S. dollars.

Re: “USD/CNY becomes a primary driver of the price of Gold in dollars.”

No, it doesn’t. The price of gold in dollars is a direct reflection of the changing value of the U.S. dollar – nothing else.

What if attempts to replace the U.S. dollar come to fruition? What if we wake up one morning and find that gold is officially priced in CNY? or another currency? or Special Drawing Rights? What does that mean?

If gold is priced in yuan, then everyone will simply monitor the price of gold in yuan going forward. But that will not tell us anything new or different about gold. It will tell us only what is happening to the value of the yuan. Because, at that time, the price of gold becomes a direct reflection of the changing value of the yuan.

There is an additional wrinkle for holders of U.S. dollars. And it is the same issue that affects anyone else today who transacts in gold and doesn’t own or have U.S. dollars.

When someone pays Euros, Yen, or Swiss Francs for gold, the amount they pay is based and calculated on two specific things, BOTH of which involve the U.S. dollar.

The first is the U.S. dollar price of gold:

The second is the exchange rate between the US dollar and the other currency used.

“The amount that someone pays in Swiss Francs (or any other non-USD currency) is determined by calculating the exchange rate between the US dollar and the specific non-USD currency involved. Based on that calculation, it is then known how many Swiss Francs are needed to equal the transaction amount in US dollars.” (Gold – It’s Still All About The U.S. Dollar/Kelsey Williams 27Feb2017)

The same factors would apply if gold were priced in Chinese yuan. Except that the roles are reversed. The Chinese yuan would assume the U.S. dollar’s role/position and the U.S. dollar would then become one of the “other” currencies.

The role of gold remains unchanged. And so does its value. Gold is original money and every other form of money is secondary. All paper currencies are substitutes for gold, and all currencies are in continual depreciation.

The only thing that changes is the relative value of the various currencies to each other. Gold’s value does not change. It’s price changes. And it’s price is a function of whatever currency it is priced in, i.e,. dollars, yuan, euros, yen, etc.

Some analysts continue to cite what they claim are ‘drivers’ of the gold price. There are no drivers for gold’s price. The changing gold price is a direct reflection of the changing value in whatever substitute medium is in use at the time. Right now it is the U.S. dollar.

Someone said they would just wait for the collapse of the U. S. dollar and become multi-millionaires by owning gold when it goes to $50,000.00 per ounce. On paper, yes. But the actual results won’t be as expected.

That is because gold at $50,000.00 per ounce represents a ninety-seven percent decline in the purchasing power of the U.S. dollar from its current value. Which means that the general level of prices for all goods and services will have multiplied forty times over.

The forty-fold increase in the price of gold would be offset by the forty-fold increase in the cost of living.