With even the President of the United States telling the Press that he supports a "Strong $ Policy" against the daily sight of a weakening one, the prospects of competitive devaluations breeding currency instability is bringing to the fore an emerging hunger for gold. Are we heading towards economic structural rupture? Many respected, informed observers are deeply disturbed, despite the seeming optimism being expressed in the markets right now. As in most past crises, such destabilisation on the international front prompts a turning to Gold which acts as a thermometer of the changing investment climate. It is becoming clearer now, that the apparent strength the $ possesses and which they support is not a strength in value, but influence and domination.
To get a fuller picture of this scene, we have to go outside the financial markets to avoid the frequent myopia of the financial observers and see that we are looking at the consequences of the purposefully engineered policies in the market place.
Not for one moment can we believe that the $'s price is an accident, beyond the control of the U.S. Authorities. If you believe it is, put this article down, clear your debt and, with anything left, buy gold.
As you are still reading, we take it that you too believe that the U.S. authorities have their hands on the steering wheel. The map they are using and the firmness of their grip on that wheel, may well be in doubt, but not their direction.
The present uncertainty in the currency markets is uncertainty on the part of the market players, not governments controlling money. We acknowledge the huge competence of the monetary authorities, moving down, what in their mind, are chosen paths toward selected objectives. When we understand what their objectives are, we give clarity and direction ourselves.
- A weak $, working the "J" curve, is clearly part of the policy of the U.S., despite government statements to the contrary.
- The intended "re-flation" of the U.S. economy is another.
- It is becoming clearer by the day that a "policy of inflation" is prepared and about to slip into the scene, masked initially, by the first symptoms of deflation.
- But yet another key aspect of these policies is the consolidation of the U.S. $'s position of power, which believe it or not, is served well by a weakening $. With no better way to shape the global economy to its needs, a "weak" $ exports deflation to dependant, exporting nations, whilst importing growth to U.S. home markets.
The response in Europe, does not give us hope that global unity is the chosen direction. European Central Bank council member and Bundesbank President Ernst Welteke reiterated Tuesday that "the central bank strives for maintaining a strong and stable currency. He said that a strong Euro reflects confidence, boosts spending power, and supports the Bank's goal of price stability." No mention of International impact or concern here.
Is Europe cooperating with the U.S. on the matter, or simply taking advantage of the situation to achieve its own objectives?
And Gold's role in this?
- Inflation cheapens the value of currencies, elevating the gold price in the process.
- Deflation causes uncertainty and chases Investors to an item not declining in value with deflation - Gold.
- But now with the Fed determined to fight with chosen weapons, gold is now attracting the professional Investor, from the grey haired competent Bankers to the sagacious, equity Investor fleeing uncertainty, to a place of more certain value.
- We are now seeing the "Safe Haven" buyer turning to gold, and we expect, subsequently, him to see it as an "Value Anchor" but at much higher prices.
Right now the gold price is "tracking" the Euro, so it seems. Put another way, the gold price is moving inversely to the $. Apparently then, gold appears to somehow been fixed to the Euro, which cannot be so. The very concept of gold fixed to any currency is anathema to every Central Bank. For sure the $'s is the currency of the largest, the strongest, most powerful nation on earth, and a measure, on paper of its value. Now it's also a measure of the potential woes of the entire world economy, of which the U.S. A. is the driver, with gold, the thermometer, showing us all the true state of monetary confidence and stability.
But the battle of the currencies is not only about the $ and the Euro, it is about the state of the world's economy and its Monetary system. The climate of instability, irrespective of the results, and the collateral damage are our point of concern, not the Victor. It is the general climate of instability that is drawing gold back to the monetary scene. As the money battle heats up, what do we see and what is each side telling us: -
- Since its peak, the U.S. $ has lost more than 40% of its value against the Euro, and the fall looks far from complete.
- Sterling - that 'joined at the hip U.S. ally. sits in a similarly weak state as the $, and apparently happy to be there.
- Europe - the Euro, an insufficiently founded, political clone of European currencies is taking the lead, holding its benchmark interest rates at 2.00% after the drop in rates, against a U.S. 1.25% and asking for trouble. Investors are trading their dollars for Euros and shifting cash into the Euro zone in search of higher yields for their money. The Euro has risen by about 25% against the $ in the past year. There is little talk in Europe of sustained intervention to halt the euro's rise of the last few months. The European Central Bank (ECB) seems happy with the euro's appreciation, which implies a considerable tightening of monetary policy—one rule of thumb suggests a 2% rise in a currency is roughly equivalent to a quarter-point rise in interest rates. Nobody believes Europe needs a tighter policy, whilst Germany screams for a looser policy, as it is wounded by deflation. Yet the ECB stands firm on interest rates, and watches the Euro rise. Do they have a hidden Agenda - they must have!. It appears they want the Euro to be a key reserve currency in the world, alongside the $. After failing to convince the markets for the first years of its life, the euro seemed doomed to failure. At its low point, it had lost more than a fifth of its value against the dollar at its launch in January 1999. Germany, in particular, was not happy, with its post war history of currency strength and reliability. The strong mark was near inflation proof. But the euro's fortunes have been reversed. Germany's export industries are in pain. However, European interest rates are low, but against the U.S. rates they are still high. The Eurozone as a whole is taking strain, so why the appreciation? Again we say, not an accident.
- Japan - Recently, Japan said that it had sold yen to the tune of $20 billion (€18 billion) in the first three months of the year, confirming their policy of preventing the Japanese currency from taking away its international exports competitiveness. Why? The Bank of Japan has what used to be called a "dirty float" [stealth policy], unobtrusively placing orders to buy dollars with banks rather than openly entering the market, starting last week, pulling the Yen back from the Y115 level, against the $. This accounted for the mid-May reversal in the dollar - yen rate. This highlighted that the BOJ stepped up its market activity to prop up a weak yen,coming into the market with a "good size" of dollar- buy orders. Their motive is simple and desperate. The need to keep their export lifeline intact. A weakening $ threatens to digest this market, replacing the Japanese imports with their own, shoring up the U.S. economy at the expense of among others, Japanese imports. With Deflation so embedded in Japan, and a devastating banking crisis being held off by the Bank of Japan's rescue efforts [of Resona Bank] and the writing off of $39.3 by the seven largest Banks in Japan, they just cannot afford to lose any more exports, even at the sacrifice of the Yen and a 'stable' monetary policy. The opportunity to prevent deflation in Japan has long gone, entrenching itself, as it has through falling prices for the last three consecutive years. With the Japanese government suffering from a hormone deficiency, the necessary reforms needed have just not been implemented. With interest rates at zero, this policy of Yen weakening has to go on, and on and on.
- Gold - Right now the gold price is "tracking" the Euro, so it seems. Put another way, the gold price is moving inversely to the $.Apparently then, gold appears to somehow been fixed to the Euro, which cannot be so. For sure the $ is the currency of the largest, the strongest, most powerful nation on earth, and a measure, on paper of its value. Gold not only defines the $ [whilst appearing to be defined by the $] critically measures the true state of international monetary confidence and stability. This role of gold was foreseen and approved by the key Monetary Authorities of the world in the "Official" gold market, we believe. As the widening of the value gap between the Euro and the $ continues, gold continues to build a foundation, from which to spring, far away from currencies and upwards in the relatively near future..
And the future for the $ in value terms? Poor extremely poor, even the legendary George Soros tells us he is selling dollars in currency markets, and buying the euro and the currencies of Australia, Canada and New Zealand against the dollar, as well as Gold, because he listens to the Treasury Secretary Snow. Please note that this is the man that precipitated Britain's humiliating exit from Europe's exchange rate mechanism -- the precursor to Europe's 12-nation currency. He joins the majority of market observers who believe that the U.S. Administration changed want a "Weak $ [value] policy". From this weakness will emerge a far stronger U.S. grip on the global economy, through the weak $.
"Strong to Weak $ policy"
U.S. Administration statements of late, confirming this change: -
- Whilst maintaining that the U.S. had not abandoned its strong $ policy Treasury Secretary John Snow made other remarks that suggested that the U.S. had abandoned its "Strong $ Policy".
- Treasury Secretary of the U.S. John Snow told ABC's "This Week" show that a lower dollar "helps exports, and I think exports are getting stronger as a result."
- Subsequently and amazingly on another show, later, he again "confirmed" the Bush administration's policy to support a strong US dollar. "We believe in a strong dollar," Snow said in an interview on Fox News! He added that the best way to ensure that the dollar regained its strength was to establish strong economic fundamentals.
- To add salt to the wound Snow criticised attempts by monetary authorities to intervene in currency markets. Snow, speaking days before meeting his Group of Seven counterparts, said Japan and Europe should not blame a weaker dollar for their economic woes, adding that they should not devalue their currencies to boost growth.
- On Tuesday, the White House expressed its support for a strong dollar, the second time in as many days.
It is very hard to dignify this sort of behaviour, except to say it is the pattern set decades ago, designed to supply sufficient "smoke" to dissipate an all out attack on the value of the $. The statements are all very reminiscent of the 70's, when Central Bankers, such as at the Bundesbank, used to say "we will not devalue". This was usually the 'buy' signal for traders and speculators to take positions in the Deutschemark, knowing that in a week or less, it would revalue! Did John Snow take lessons from Saddam Hussein, who took this art to new heights?
By a "strong $ policy" U.S. Officials from the President down, cannot be referring to value, but to influence and power, an alarming prospect?
The real Policy behind the Currency & Trade Wars
We have stated in G-AM that the fall of the $ began the "Currency Wars". This "war" is about the U.S. recovering at the expense of the rest of the world, particularly its friends in trade.
All will acknowledge the U.S. is the only Superpower in the World, indeed it is the dominant World Power, indisputably! The $ is the "Imperial" currency of the world, as the realities show. Quite properly, the U.S. Administration is charged with caring for the interests of the U.S., before any others. All policies must have that as their objective. So, like any dominant power, the U.S., to maintain its own strength, will draw power and wealth from those dependant upon it, if need be.
Right now the U.S. is on the brink of Deflation, possibly "Stagflation", having exhausted the bulk of its options in stimulating the U.S. economy, except for Inflation. It has to do something to create confidence. An obvious solution was the working of the 'J' curve, translated as dropping your currency until your products are competitive abroad, so promoting exports and discouraging the, now expensive, imports. But when the driver of the world economy does it, its friends, its trading partners have to face the reverse! The situation is exacerbated when 86% of the world's trade is conducted in the $ and 76% of the world's savings are held in the $. The world has never seen so effective a tribute system as is now being seen in the $'s fall.
The Bush Doctrine
Tying this into the Administration objectives so as to validate this thought, we reflect on the "Bush Doctrine" laid out in a national security statement late last year. When he talked of Alliances, he stated: "We will be prepared to act apart when our interests and unique responsibilities require." [This applied not only to Military situations]. The victories in Iraq and Afghanistan, took the U.S. from Superpower to Imperial Power and confirmed the reality the Currency markets were witnessing. Whilst it may not sit comfortably in the U.S., the U.S. is now an Imperial Power, on all fronts. The dropping $ moves the U.S. from a position of weakness to an effective policy of self preservation and a strengthening of position in the World Economy. Yes, this is a policy of consolidation of power, economic power. It has to be this way, or the U.S. would be the first Imperial power not to follow that path and that path is irresistible!
To get a proper slant on this and not a critical one, we have to look through the eyes of U.S. Imperialism, a concept most American seem to reject outright. But this dominance is a fact that needs addressing, as in the same way you can't just liberate Iraq and expect it to come right without an "Imperial presence". But past empires were weakened and brought down by imperial hubris - overextension and interference, across the globe. In a display of impressive efficiency, the U.S. has seemingly cut out many of the expensive and exhausting factors attendant on maintaining an empire: -
- No permanent dominance of countries through U.S. colonial governments.
- Minimum troop presence to maintain in areas of vital interest.
- Now the statement made by President Bush, "This nation never conquers, but we liberate" highlights an important aspect of this "Smart" Imperialism. As quickly as possible, the defeated country must be collectively [U.N. involvement] reconstructed and handed back to the 'liberated' citizens.
- "Smart" economics then ensures that the U.S. as part of the spoils, manages, controls and benefits from the key, exportable assets, such as oil. When done under the auspices of financing, not reparations [a mistake of earlier empires], but reconstruction, then maximum benefit is achieved by the "liberators".
- The power lies with Control of the assets, but the responsibility with Ownership, which is passed back to the defeated nation. Certainly an economically efficient and politically digestible outcome?
The fog now begins to clear on the "Strong $ policy", and we would like to call this phase of U.S. Imperialism, "Consolidation". The $'s role in this Imperialism is fundamental. Through it, one extracts the spoils, whilst acting with 'good' motive. The ramifications of this policy will be the weakening of its trading partners, suppliers in the main, in favour of the U.S. itself. Its weakened and now more dependant partners are compliant through necessity.
Result : A "strong $" through a weak $!
The challenge from the Euro?
But Europe is not a willing participant in this process and appears not to be in favour of the motives behind this $ policy. Perhaps a late and emasculated challenge is now being offered by Europe to this Imperialism? The reticence to follow either the example of Japan, in weakening the Euro, or dropping Euro interest rates early, points that way.
We rather suspect that the initial annoyance of the Bush Administration at Eurozone interest rates staying high was because the resulting, persistent strength of the Euro has allowed it to be bought on a large scale, so providing a credibility it did not have before and perhaps beginning to offer an alternative to the $ as a respected currency. To date a challenge from a growing Europe, whilst far larger than the States, absorbing country after country, with its 'political' currency, is not really a credible one. It remains dependant on the States for its economic health and will do so for some time. Certainly, the Eurozone is beginning a challenge to the hegemony of the States, but not yet effectively. But is the importing of the U.S. deflation and the weakening of export competitiveness to the $ is too high a price to pay? The sheer size of the Eurozone gives credibility to the Euro's strength, or does it?
The question remains, how long will it keep up this posture, before bringing about the debilitation of the Euro to keep competitiveness, or does it have the power to snatch some of the $ Imperialism for itself?
In the present position of strength, the U.S. can now weaken the $, irrespective of its over-borrowed state and see a suffering world accept it and have to copy it, as far as it goes, through inflation / stagflation and on to an even more dire state, still? Currently, the $ is calling the shots all the way, but will the rest follow?
Collateral damage - the dangers from competitive Devaluations to Economies
The only danger that exists to this policy is the one mentioned by Snow. Japan and Europe may devalue their currencies to prevent this process and their emasculation. Have they an alternative? Unfortunately, no! World Trade Organisation rules will not stop this process, so the threat of a trade war looms.
As the U.S. currency weakens, the Asian currencies weaken themselves, including the Chinese currency and become increasingly competitive alongside the $, against, particularly the Euro. Europe will then attract not just U.S. goods, but more Asian goods too, so they can only respond to a weak $ by weakening their own currency or suffer accordingly. The result could be a worldwide pattern of competitive devaluations to maintain trade competitiveness, with the threat of a trade war. The most accessible port in this storm will be Gold. Gold will then be rising, as currency values sicken and bring on the fever pushing Gold up.
`For individual businesses this situation can make them collateral damage quickly. Importers and Exporters are in the firing line, can find a currency move against them, leaves them with overpriced stock, or uncompetitive prices on their products. Covering currency risks is expensive, especially for small businesses. We are fully aware of the impact on gold companies of hedging positions, that limit potential profits, so it is with businesses who cover currency risks the wrong way.
As with Individuals, small to large businesses so with national economic policymakers. But national economic planning is not so easy as with businesses. Exchange rate instability, can become a horrendous experience for all.
Whilst inflation is still dropping in the States in the face of a weakening $, contrary to normal economic theory, insidious deflation appears to be countering the expected inflationary surge following the depreciation of the dollar over the past year or more.
As other vulnerable nations struggle to counter impending deflation, a natural consequence of too strong a currency with too expensive exports, their will be little choice other than to pump the money supply, inflate the economy and consequently weaken the currency still further. As we see in the States current policies, keeping internal liquidity high is critical to stave off devastating and debilitating deflation, so it is no surprise that Inflation is now being discussed as 'policy', ostensibly to defend against the awesome destruction of deflation. Like Musical Chairs, on the international front, the currency that stays too strong will pay the price in trade.
Exceptions - The exceptions will be those nation who export raw materials, whose price is market related [priced in $ usually] and not in their own currency. In these cases the exchange rates of the local currency has internal ramifications not external ones. So no wonder the C$ and the A$, alongside the currency of New Zealand, are highly favoured. Were the prospects clearer in South Africa, perhaps the Rand would join that group.
Quo Vadis, you may ask? Like Pax Romana, once established, the U.S. will repair its own economic woes, at the expense of its trading partners, readjusting the balance of power accordingly.
The future pecking order? Back to President Bush's doctrinal policy statement late last year. "The United States is committed to lasting Institutions like the United Nations, the World Trade Organisation, the Organisation of American States and NATO as well as other long standing alliances. Coalitions of the willing can augment these permanent institutions". Roughly translated, this means, play ball and we'll get along just fine, but we are in charge.
- There will be a "weak $ policy", until the U.S. trade position has benefited fully from the "J" curve process. Once "strong fundamentals" are in position, the $'s strength will be reflected in its stability and strengthened dominance, but not in its value!
- Gold Bullion has begun stepping up into the breach, and acting like the Euro matching its strength against it. Whilst a whole host of factors are contributing to the gold price rise, Euro moves are today's flavour. As we said earlier, we would subscribe only to a tentative link to gold, but not one that can be prescribed, or permanent, because Monetary authorities object to the judgements by gold on their currencies, so distort such relationships.
- But Gold cannot be devalued, it cannot be inflated, so will revert back to its traditional role as a measure of value. As Gold begins its path back to the monetary arena, again, it is currently being bought because of the uncertainty surrounding investments, which inevitably are measured in currencies.. There is no doubt that the structural weaknesses appearing in the key world economies are encouraging the prudent to turn to Gold.
The long awaited arrival of the defensive professional Investor has been slow, but is now visible. The next phase will be for gold to be bought because of the recognition that gold holds value, against depreciating currencies. Monetary authorities have seen this and prepared for the time when they too will use gold as a "Value Anchor".