China to pull the plug on the USD, switch to gold

This marks another major milestone along the bankruptcy of the US economy. The widely predicted collapse of the Federal Reserve dollar grows ever closer now as US creditor nations have finally had enough.

Beijing is considering changing its asset allocations during the financial tsunami in order to build up gold reserves “in a big way,” the source said.

China’s fears about the long-term viability of parking most of its reserves in US government bonds were triggered by Treasury Secretary Henry Paulson’s US$700 billion (HK$5.46 trillion) bailout plan, which may make the US budget deficit balloon to well over US$1 trillion this fiscal year.

The US government will fund the bailout by printing new money or issuing huge amounts of new debt, either of which will put severe pressure on the value of the greenback and on government bond yields.

The United States holds 8,133.5 tonnes of gold reserves valued at US$188.23 billion. China holds gold reserves of just 600 tonnes, worth only US$13.89 billion.

Beijing’s reserves could easily go up to 3,000 to 4,000 tonnes, Tanrich Futures senior vice president Colleen Chow Yin-shan said.

Iran is quoted as having also just begun the process of converting its financial reserves (tip: Max Keiser).

Iranian newspapers are quoting Mojtaba Hashemi Samareh, a top advisor to President Mahmoud Ahmadinejad, as saying the country has converted its financial reserves into gold.

The papers did not specify how much of Iran’s estimated $120 billion in reserves would actually be converted into gold.

This is happening precisely as Peter Schiff predicted.