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Economy , Finance , Investing , Personal Development

Here Comes China – Whether You Like it or Not

September 28, 2016

On Monday I talked about how the US dollar has enormous influence on the price of commodities.

Because the US dollar is the world’s reserve currency, commodity prices are correlated to the strength of the US dollar.

But that could soon change. At the end of this month (September 2016), something is going to happen in the international currency world. This event has never happened before and could end up significantly impacting the currency market – which means it could impact the price of things.

This ‘event’ is not a prediction – it’s actually going to happen.

It’s the inclusion of the Chinese yuan into the IMF’s basket of reserve currencies, better known as SDR’s (Special Drawing Rights).

Don’t worry if don’t understand that last sentence. I’ll break it down here…

First, the IMF is the International Monetary Fund. Their job is to “ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other.”

The IMF made Special Drawing Rights by creating a ‘basket’ of currencies. This ‘basket’ is made up of the US dollar, euro, Japanese yen, and pound sterling.

…And, effective October 1, 2016, the basket will be expanded to include the Chinese yuan (also known as the renminbi).

The inclusion of the Chinese yuan is a huge vote of confidence for China. Basically, the IMF is saying that the Chinese currency is important enough to be included with the other ‘major currencies.’

Here is a great video that the IMF created to explain what an SDR is:

  • U.S. dollar 41.73 percent (compared with 41.9 percent at the 2010 Review)
  • Euro 30.93 percent (compared with 37.4 percent at the 2010 Review)
  • Chinese renminbi 10.92 percent
  • Japanese yen 8.33 percent (compared with 9.4 percent at the 2010 Review)
  • Pound sterling 8.09 percent (compared with 11.3 percent at the 2010 Review)

The US Dollar barely lost any ground compared to the yen, euro, and pound sterling, but it still lost a tiny share. Technically speaking, this change in the basket puts less emphasis on the power of the US dollar.

This doesn’t mean the dollar is going to crash; simply that buying power may be starting to decrease.

(The next review of what currencies will make up the SDRs is on September 30, 2021. Maybe the Russian Ruble will be included then…?)

For an investor, this should be something to know about. If you are holding lots of US dollars, your buying power may be decreasing.

So how do you keep your buying power alive?

You can begin to diversify your holdings into assets that may keep value better than the dollar.

One idea is commodities. Right now commodities are very cheap in dollar terms. In times of a strong dollar, commodities are less expensive, while in times of a weak dollar commodities become more expensive.

If we see that the US dollar is weakening, then in theory we can buy commodities to hedge the loss of buying power.

Right now, the grains ETF stock $JJG looks like an attractive candidate to hedge the diminishing value of the dollar. Additionally, grains have been in a horrible bear market, so it’s a hedge that isn’t overly expensive.

Foreign real estate in select markets also fulfills this hedging idea. I’ll share a couple markets with you on Friday that I think look very attractive.