Currency Turmoil Makes Precious Metals Ownership a Necessity
by Stefan G. President of Money Metals ExchangeThe first two months of 2015 have
seen turmoil in the currency markets extend from Russia and Ukraine to the heart
of Europe.
“Central Banks Now Open 24/7 Fighting
Currency Wars and Deflation,” blared a February 12th Bloomberg headline.
Against this backdrop, precious metals have been on the rise in terms of all
currencies except the Swiss franc and the U.S dollar.
In January, the Swiss
National Bank shocked markets by announcing that it would de-link its currency from the euro.
The move came one week ahead of the European Central Bank’s $1.1 trillion
Quantitative Easing announcement. Swiss officials decided it would be too
costly to keep accumulating depreciating euros in order to maintain the
currency peg. The Swiss franc surged by the most ever in a single day.
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With the exception of Switzerland,
all other countries in Europe (and many others around the world) are trying to
depreciate their currencies.
Since January 1, the following
central banks have announced interest rate cuts or other monetary easing
measures: European Central Bank, Reserve Bank of Australia, Reserve Bank of New
Zealand, Monetary Authority of Singapore, and the central banks of India,
Canada, Denmark, and Sweden.
On February 12th, the Swedish
Riksbank announced a surprise rate cut from 0% to below 0%. “To ensure that
inflation rises towards the target, the Riksbank is prepared to quickly make
monetary policy more expansionary, even between the ordinary monetary policy
meetings,” the world’s oldest central bank said in a statement.
Sweden joins the European Central
Bank and the central banks of a handful of other countries in pushing benchmark
interest rates into negative territory. These central bankers are all aiming to
revive inflation. “Investors” who are buying bonds yielding less than nothing
(a negative rate) are apparently convinced that central bankers won’t succeed
in depreciating their currencies.
Insanity!
Investors Now Paying for the
“Privilege”
of Lending to Broke Governments
This could go down as one of the
oddest, most irrational asset bubbles in history. Trillions of dollars are now
tied up in debt instruments that promise to return less than the invested
principal. According to a report issued by J.P. Morgan, $3.6 trillion in
government bonds around the world now carry negative yields.
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It raises the obvious question; why
would so many people be willing to accept a negative rate of return?
You’d think that institutional
investors would start getting wise to holding gold as a hard-currency
alternative to cash instruments that yield less than zero. The fact that gold
has no interest rate is actually an advantage in an environment where competing
rates are negative! Plus, unlike most of the bonds issued in this upside-down
interest rate market, gold has significant appreciation potential.
If inflation rises even modestly to
the 2% target of European and U.S. central bankers, then bonds issued at rates
of below 2% will all be losers. The two-year Treasury note yields only 0.63%.
Even the recent 10-year yield of 1.98% fails to match the Federal Reserve’s
inflation ambitions.
In this environment of ultra-low
nominal yields or even negative real yields, precious metals as a reserve asset
look very attractive. Many central bankers around the world agree and are
busily accumulating gold. According to a report issued by the World Gold
Council in February, governments around the world added 477.2 metric tons of
gold to their reserves in 2014. That haul was the second biggest in 50 years.
When inflation fears return to the
market, as they eventually will, precious metals will become one of the premier
asset classes to hold. Even now, they are performing better than virtually all
other world currencies.
The end game of these ongoing
currency wars is that all fiat currencies will be debased. And a true
flight to quality will accelerate – with assets fleeing depreciating currencies
(and debt instruments denominated in them) and piling into gold and silver.
Will the Fed Chicken Out on Rate Hikes?
Of course, right now it’s deflation
fears that are dominating headlines. But the inflationary policy responses from
the European Central Bank and others that have followed the ECB’s lead have
lifted gold and silver prices markedly in terms of euros and other currencies.
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As confidence in European currencies
plunges, there’s only so much corresponding dollar strength the Federal Reserve
is willing to tolerate. There’s been much talk of rate hikes coming later this
year, and that widespread expectation has been priced into the market. Any
rhetorical or policy disappointments from the Fed in the months ahead could
cause traders to sell the dollar.
Whether later this year or further
down the road, it’s only a matter of time before currency turmoil spreads to
the United States.
The U.S. has a higher debt-to-GDP
ratio than some troubled European countries. It has higher levels of unfunded
liabilities (estimated to be in excess of $100 trillion) than any other
country. The dollar’s status as world reserve currency has allowed the U.S. to
become financially overextended. But that vaunted status is slowly
deteriorating as Russia, China, and other countries form economic alliances
that bypass the
dollar.
When these chickens come home to
roost, you don’t want to be wholly dependent on the U.S. government’s promises
or its currency. Sizeable holdings in physical precious metals will help make
you financially resilient in the face of the spreading global currency crisis.
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Stefan Gleason
is President of Money Metals Exchange, the national
precious metals company named 2015 "Dealer of the Year" in the United
States by an independent global ratings group. A graduate of
the University of Florida, Gleason is a seasoned business leader, investor,
political strategist, and grassroots activist. Gleason has frequently appeared
on national television networks such as CNN, FoxNews, and CNBC, and his
writings have appeared in hundreds of publications such as the Wall Street
Journal, Detroit News, Washington Times, and National Review.
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