China To Start Fund That Hedges Against Dollar Decline

Today CNBC headlined a story titled, “China May Start New Sovereign Funds to Invest in Oil, Gold: Reports.” The source of the story was Reuters. What they failed to report was the real story behind the headline. China is essentially creating a hedge fund against the dollar and I will show you why.

China announced that it plans to start new investment funds to diversify the countries holdings in foreign exchange reserves. It is specifically looking at purchasing oil and gold to diversify its wealth around. The article says that some analysts even appear puzzled by this move. Those must be some stupid analysts because to motives are quite clear.

Gold and oil are the two things China would want to hold if they were protecting themselves against the dollar declining. Remember, both of these are the ultimate safe-havens and they are tied directly to the dollar. As the dollar implodes, gold and oil will take off.

China now realizes that they hold way too much US debt and stand to loose big time if the dollar continues to go south. However, China can offset much of the anticipated losses by investing in the two things that will go up in proportion to the US dollar going down. I believe investors should take carful notice of this move.