A lot of investors think that the Chinese currency should appreciate against the dollar and most major currencies, and we agree. It is possible today, even though the currencies are not free-floating, to receive the investment return of the currency rate via the Market Vectors Renminbi/USD ETN (CNY) and the Market Vectors Indian Rupee/USD ETN (INR). Still, I advise against buying those ETNs, even though I am bullish on both the renminbi and the rupee.
ETNs (exchange-traded notes) are very different from ETFs (exchange-traded funds) as they are liabilities of the issuer — there are no renminbi or rupees in the ETNs. They are unsecured liabilities of Morgan Stanley (MS), which promises to pay the investment return of the renminbi or the rupee. That’s about it.
If Morgan Stanley goes bankrupt, those ETNs are worthless — just like the ETNs that Lehman issued became worthless. In addition, both ETNs have illiquid volumes and generally benefit the Morgan Stanley trading desk by providing wide bid-ask spreads to arbitrage. Investors should stay away.
In the event of BRIC currency appreciation — not just for the renminbi — I believe that gold bullion will see substantial investor interest as holders of Western currencies — dollars, euros, pounds, etc. — reach for a way to hedge their exposure.
The inflation-adjusted price for gold bullion from 1980 is about $2,500, and it can easily be surpassed as a renminbi revaluation begins in earnest. While I don’t know when this will happen exactly, the likely target for renminbi revaluation is 5 to the dollar, from the current 6.83. In the past the better than 20% revaluation took about 3 years (2005 to 2008). The next leg higher in the renminbi might be faster, given that the PBOC has been keeping it flat since 2008.
My favorite way to play the coming renminbi surge is via the SPDR Gold Trust (GLD). This gives you the stability of an ETF as opposed to an ETN, and allows you to ride the inflation of commodities due to a weak dollar and strong renminbi.
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