GOLD IS UNDER PRESSURE BUT CHINA AND RUSSIA CONTINUE TO STACK UP THE PRECIOUS METAL

Gold has been under pressure for the greater part of May and the sell off escalated towards the end of the options expiry period. Since reaching a high US$1,300/oz, gold has fallen by almost 7% to US$1,212/oz.

Most of the fall has been the result of the Fed's hawkish stance which spiked up the US$. With many investors believing that gold moves inverse to interest rates hike, added to the sell off. To recap in my earlier post, gold DOES NOT have an inverse relationship with interest rates. See the chart here:



More than anything, it is a hedge against both inflation and deflation.

Now if gold does not carry that value, why are central banks accumulating gold and dumping the treasuries?

The World Gold Council reported that in April,

Russia added 16.2 tonnes of gold
China 10.9 tonnes
Kazakhstan 3.2 tonnes
Turkey 2.6 tonnes

Notice that these countries are linked to the "One Belt, One Road" project, linking Central Asia with Europe? Behind the scenes something is brewing. Will the common denominator for trade in this massive project be a gold backed Yuan or Ruble? We can only wait and see. But the ramifications on US$ could be huge.

Then there was a report in SchiffGOLD that central banks have sold US$123 billion in US debt in Q1 2016 and last year, the amount was US$226 billion. In fact, the Treasury Department reported that central banks were selling US Treasuries at a pace not seen since at least 1978.

Could this the be reason that the Fed went into full throttle in jawboning the US$ with interest rates hike? Otherwise who wants to buy the US Treasuries when major debtors like Russia and China are selling them? Recent reports seemed to confirm the fact that US Treasuries were back in demand after the series of jawboning by the Fed officials.

Is there a currency war that is presently fought in the stealth between major economic powers?

Meanwhile China is responding with a devaluation in the Yuan which could be followed by even more devaluation in the future as the US$ grows stronger.

Incidentally, China has also been signaling that it may issue bonds in SDR which is the IMF's Special Drawing Rights. China has also suggested that the SDR be used more widely.

All these moves seem to suggest that China is moving away from US hegemony.

The currency war has only just begun.