Compete by Currency Devaluation

Are we witnessing the beginning of an era of global currency devaluation? Clearly, the US dollar has been substantially devalued and Canada has unexpectedly reduced interest rate by 0.25 today. Elsewhere we see EU, Japan, Australia and New Zealand withholding their interest rates. Suddenly, the US dollar is not the only currency falling but also declining are or would be the Euro, Yen, Canadian $, A$.... Whether this devaluation competition represents a reaction by other governments to counter the effects of the free falling USD, I can't tell but I am quite sure that it is unsafe no matter which major currency you are holding!

In Hong Kong, the negative impact might be very devastating. Since the HK dollar is pegged to USD, we have already suffered from the substantial depreciation of USD and the rapid appreciation of the Chinese Yuan in these few years. Inflation in HK is well-above the official figures released and excluding real estate and fuel, I think the actual inflation rate for 06-07 should be 4%-5% at least. Take a tour around our department stores and supermarkets and you will notice the rising prices of food, clothing, books, etc., everywhere. Some say that this is a very good sign to show that our economy is booming! To me, such comment is really rubbish and represents an attempt to mislead the public and disguise the underlying problems facing our economy.

In the real estate sector, the danger is perhaps most unnoticed. Property prices have risen rapidly by 15%-20% since the beginning of the year and in many cases, the level has gone well beyond that in the property boom of the 1990s. In contrast, the real gain in the income or salary of the ordinary man in the street is perhaps negative after discounting the dollar depreciation, rising costs of living, etc. I am sure we are seeing a huge asset-inflation in the real estate market and there is nothing to celebrate if you can still remember what happened to Hong Kong and other Asian cities in the financial turmoils of 1997-98. Sadly instead of doing anything to control the situation, no one in Hong Kong seems to be concerned with such problem. Perhaps, everyone is too happy to see their asset inflating everyday and I am sure that our government will come to bail you out when the bubble bursts.

Now the question that I have is what should you hold in face of the global currency devaluation competition and unending inflation? I have some ideas:

1. Sell HKD and buy the Chinese Yuan i.e. RMB. I think Jim Rogers would surely agree. RMB is bound to appreciate in view of the property and stock market mania and uncontrollable inflation in Mainland China. Macro control over the Chinese economy does not seem to cool it down but what else can you do other than increase interest rate, tighten money supply, curb lending, etc.?
2. Should you buy Gold? Yes, at least you should buy some gold, even though price has reached record high.
3. Should you buy oil and other commodities, e.g. metals, agricultural products? I am not sure whether holding commodities is popular in Hong Kong but why not hold commodity stocks? There are lots of them listed and to be listed in Hong Kong and if you don't mind paying the currency price, you may invest in overseas commodity stocks.
4. Investing overseas particularly in non-USD assets has been recommended by many financial advisers. But I have grave reservations now as we are seeing a global currency devaluation competition. I won't be to surprised to see a quick weakening of the Euro, Japanese Yen, Can$, A$, NZ$ particularly in 2008 and if you hold investments denominated in such currency, any gain will be off set by such devaluation.
5. Have you read Marc Faber's book "Tomorrow's Gold"? If not yet, try to read one in our public library. The book contains some far-sighted comments on the devaluation of USD and the effects on commodities, emerging markets, etc. I am sure that you will get some benefits reading it.

Well, I have to check our gold price and get some gold now.