Asian trade deficits: prelude to more money printing?

Gold and silver prices slipped lower yesterday, partly perhaps because of bearish Chinese economic statistics, but the more relevant point is simply that these markets are consolidating. Whether or not this is the “spring coiling” before a dramatic move higher in either metals, or the precursor to another sharp correction is impossible to say – though Jesse argues that the odds favour an upside breakout. Platinum, however, had a decent day – with the April Comex contract rising by $10.80 to settle at $1,695.70/oz. At one point, the platinum price rose above that of gold for the first time since September last year, though as The Wall Street Journal reports, it slipped below gold again later in the session. Asian trade deficits seem to be talk of the markets at the moment, with China and Japan both reporting notable trade deficits in recent days. Chris Martenson wrote a piece published in the Analysis section of this website yesterday, noting that Japan is now recording record trade deficits as a result largely of a surge in energy import costs. Before the Fukushima nuclear disaster, the country relied on nuclear power for 30% of electricity production. But by the end of this month, that figure will stand at 0%. Resource-poor Japan is having to spend enormous amounts on importing oil and natural gas.

Meanwhile, China has reported a US$31.5 billion trade deficit for February. Partly this is also a consequence of rising energy costs – but it’s also a function of the appreciation in the nation’s currency, the yuan. As the yuan appreciates, China goods become more expensive when priced in other currencies, which means a reduction in exports relative to imports (the latter becoming more affordable for the Chinese as the yuan appreciates against other currencies).The fact that China and Japan are now both running trade deficits has troubling implications as far as heavily-indebted western countries are concerned. After all, if large Asian countries are no longer running large trade surpluses, then there will be less demand from them for western bonds, which will compound the already tricky financial situation that Europe and the US face.

However, mercantilism remains the dominant trading preference as far as both of these countries are concerned, so we shouldn’t expect the authorities there to sit back and watch these deficits increase. CNN reports that officials at the People’s Bank of China are already hinting at halting the yuan’s appreciation, while Japanese efforts to weaken the yen in recent years have been persistent – though unsuccessful on a relative basis (compared with gold, of course, the yen has weakened substantially in recent years).

So in one form or another, China and Japan will both look to weaken – or at the very least in China’s case, suppress – their currencies. Whether or not they succeed on a relative basis is tricky to predict, given that they’re squaring off against the heavyweight money printers of Europe and America. But one thing is pretty much certain: the yen and the yaun will weaken against gold, and gold will continue to benefit from these competitive devaluations.

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