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A Tipping Point for the Dollar and the Yuan

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We are at a tipping point for the advent of a new global currency that will recognize the seeds of the dollar's fall and the rise of China as the new world economic power. It will take time, but you could grasp it in the multiple examples of changes being floated in the public arena. The amazingly steady climb of gold and silver for 5 straight weeks to new peak prices is the signal that investors recognize the dollar -- and therefore dollar securities -- are risky. Gold and silver and to a lesser extent oil have become hedges against the dollar's decline.

In China, Xia Bom, an adviser to the People's Bank of China, China's central bank, did not rule out this week a one-off revaluation upward of the Chinese currency.

Such a move would be highly beneficial to the Chinese economy; it would dampen the worrying high rate of inflation by making it cheaper to buy the natural resources China requires for her 9.7% rate of growth including energy, metals, coal -- and even foodstuffs. Controlling inflation is a key priority in China, and a yuan appreciation would be a bold surprise -- but may be required if the policy of raising bank interest rates does not work.

And it would mean China could continue to buy US Treasury securities at a cheaper price to make up for the declining value of the dollar, which hit a new low for the past several decades today.

If the yuan rises as the dollar goes lower, it's beneficial for the profits of US multinationals like Apple, Proctor & Gamble, and Colgate Palmolive, that sell their products to China. That's one explanation for the surprising spike in stock prices this week, as earnings reports surprise on the upside. However, a yuan appreciation with a lower dollar might mean a spike in all other Asian currencies as well like the Singapore dollar.

Add up the negatives for the dollar. A rating agency that puts the government on notice about its credit rating. The sad spectacle of waiting until the last minute to raise the debt limit. The brutal standoff between Republicans and Democrats over the need to reduce the federal budget deficit -- estimated at $1.5 trillion -- or over 10% of the budget. Oil at $112 a barrel means a higher trade deficit, and a larger budget deficit. My gold gurus, Frank Giustra and Chris Wood, are skeptical about a meaningful deal on retrenchment in the US, and strongly believe gold as a momentum play has no equal. Wood is so optimistic he is telling US pension funds to have a 40% weighting for gold bullion and gold mining shares. This is 8 times the position just amassed by the University of Texas pension fun