Golden ETF for China’s Currency

By Don Dion 11/17/09 – 06:00 AM EST

President Obama’s trip to China has helped to heighten speculation about the renminbi and the issue of currency appreciation. While Obama’s recent references to a greater balance in trade have been met by stiff opposition from China’s officials, a recent report from the People’s Bank of China suggests that appreciation of the yuan is not out of the question.

The best way to play this potential appreciation is through ownership of alternative assets, such as gold, rather than directly owning China’s currency. Hedge fund manager Hugh Hendry speculated that the rise in oil in 2008 was a result of the rise in the yuan because the oil bubble popped right when the yuan stopped rising. As the yuan slowly appreciated, the Chinese were able to do the carry trade with U.S. dollars. Once the appreciation stopped, the speculators exited and oil plunged.

Oil was the focus of 2008, but in 2009, gold has the attention of investors and is the better play. And as with oil previously, traders already have implemented the "dollar down, gold up" strategy. Even if the Chinese do not increase purchases of gold, other investors will buy as the dollar weakens.

Bullion ETFs such as SPDR Gold Shares(GLD Quote) and iShares Comex Gold(IAU Quote), and stock ETFs such as Market Vectors Gold Miners(GDX Quote) and Market Vectors Junior Gold Miners(GDXJ Quote) are a good way to play these alternative assets.

For less risk, use a more diversified approach via ETFs such as Market Vectors Hard Asset Producers(HAP Quote).

Appreciation of the yuan would lead to further pressure on the dollar. Thus far, investors have been able to turn to the PowerShares DB U.S. Dollar Bearish Fund(UDN Quote) to benefit from the dollar slide.

UDN, however, may not benefit much from China currency appreciation, because a stronger yuan could take some pressure off the euro. The euro makes up 57% of the Dollar Index that UDN tracks.

While the WisdomTree Dreyfus Chinese Yuan(CYB Quote) would also seem like an obvious play here(跟踪人民币/美元汇率的ETF,11月成交量明显放大,但是价格还是稳稳的横着), investors will make more money by figuring out what the Chinese would buy with appreciated currency rather than by buying the currency itself.

In the People’s Bank of China’s third-quarter report, the bank changed its language regarding the exchange rate and many took it to mean that the government may allow the renminbi to appreciate. The 46-page report states that: "Following the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies, we will improve the yuan exchange-rate formation mechanism." China’s policy-makers are slow to move, and the country’s leaders will likely wait until the opportunity feels right to let the currency appreciate. Mounting pressure from the EU, U.S, IMF and World Bank, however, underscored by Obama’s recent visit, will keep more investors’ eyes glued to the yuan.

While timing the appreciation of the yuan will be difficult, the best way for investors to play this shift is with alternative asset ETFs like GLD. [b]Investors in emerging markets such as China and India have been turning to gold as a currency alternative[/b]. Soaring gold prices, economic fears and potential yuan appreciation should continue to fuel gold ETFs.

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