Monday, January 28, 2013

Are The Currency Wars For Real?

I thought it appropriate to start this piece with a quote from Ludwig Von Mises regarding the global system of "flexible" currencies:

A general acceptance of the principles of the flexible [currency] standard must therefore result in a mutual overbidding between the nations. At the end of this race is the complete destruction of all nations' monetary systems. LINK

That was written in 1949 and essentially prophesied the eventual global currency war that Von Mises visualized unfolding, as countries used currency devaluation strategies in a desperate attempt to prop up their own crumbling economic systems and "protect" their relative export power.
I am not alone in thinking that we entering a very real and very dangerous global currency war. The highly regarded Comstock Partners issued their view on this four days ago: "If we are correct, the U.S. and global economies will contract and there will be a race to the bottom with "competitive devaluations" rampant. All the countries that need exports for economic growth will be very aggressive in the race to the bottom..." LINK.

I remember when I first started looking at the precious metals back in 2001. I read one of James Dines newsletters at the time in which he was promoting gold and mining stocks as the ultimate defense against a global race to devalue currencies to zero. At the time I was unaware that his vision was based on the work by Von Mises fifty years earlier.

Essentially, in a system of flexible, floating national currencies, the currency of each nation achieves relative value in relation to the other currencies based on either relative economic strength or relative supply of the currency. With the weak global economy, nations have resorted to devaluing their own currency in an attempt to keep their respective systems from falling apart from the burdens of too much debt and as a means of making their exports relatively cheaper. The latter strategy is also an attempt to stimulate domestic manufacturing by stimulating foreign demand.

The preferred method of currency devaluation has been through prolific use of the printing press, aka "QE." As you can see from the two charts below, this process of devaluation has actually been occurring since the start of the new millennium:
(click to enlarge)

This chart shows the rise in the price of gold over the last 10 years relative to the world's major currencies. Regardless of whether anyone wants acknowledge a general global monetary policy of currency devaluation, there's no question that all the major global currencies are being devalued relative to gold (the same is true vs. the Indian rupee - link, and the Chinese yuan - link).
The second chart shows the decade-long currency devaluation of the U.S. dollar:
(click to enlarge)

This chart shows the trade-weighted U.S. dollar index, which is considered to be a better indicator of the overall purchasing power of the U.S. dollar relative to the rest of the world. This index includes 26 different global currencies, as opposed to the standard USDX, which is just six (euro, pound, yen, Canadian dollar, Swiss dollar and Swedish krona). As you can see, the relative global value of the U.S. dollar has declined over 30% since 2002.

Currency war or no currency war?

As you can see from the above charts, clearly the world's major currencies are in decline vs. gold, and the U.S. dollar has been in serious decline vs. a broad basket of global currencies. But what to make of all this "noise" in the media about a "global currency war?" After, the just five days ago the chief of economist of the IMF issued a statement saying that "[t]his increasing talk of currency wars is very much overblown" LINK

Usually when a high-ranking public official makes a point of officially deny something, it's worth taking a look beneath the surface to see if there's any substance behind the denial.
Ironically, one day after the IMF chief economist made that statement, Bloomberg News conducted an interview with George Soros in which he specifically referenced the process of ongoing global currency devaluations: LINK I would like to note here that back in November is was widely reported that Soros was actively adding to the big position in his funds: LINK. Presumably he is doing this as a mechanism to profit from global currency devaluations per the gold/currency chart above.

In addition, several major countries have issued there own warnnigs about the ongoing sovereign currency depreciation and its contribution to an escalating global currency war. Two days ago Saudi Arabia issued this statement: "Devaluation of currency by certain countries to make them more competitive in the global market has raised fears of a "currency war'" LINK

And this morning I woke to find these news reports issued respectively from economic leaders in Japan LINK, Swizterland LINK and South Korea LINK. Each article either directly or indirectly references specific actions being taken to devalue the respective county's currency. In the South Korean report, a Central Bank member specifically references the outbreak of a currency war.

So there it is all laid out. I'll leave it to the reader to decide for themselves whether or not they want to believe that the Von Mises proposition is unfolding before our very eyes. I will say that it appears to me as if the Jim Dines forecast of a coming race to devalue global currencies (mentioned above) that I read in 2001 looks to be very real and in motion. It also appears that the best way to defend your wealth against this insidious paper currency devaluation is to buy gold and silver. I always recommend buying the physical metal and taking delivery of it in some form, as opposed to buying the paper forms like GLD and CEF or buying into these "fractional" bullion paper accounts being promoted by Kitco and Monex.


  1. Very good post with a lot of good links!

    I have been watching the whole currency war since CONgress was accusing China of keeping its currency low. There was no problem before the 2008 crisis but times have changed. There is also a growing "protectism" starting up as a off-shoot pf this. China is accusing two foreign firms of having unfair advantages over chinese's firms. This is simply stage 2 of the collapse of the current global economic system (stage 1 being currency wars).

    "we entering a very real and very dangerous global currency war". The sad part is that it can't be stopped. It's too late. The global system is going to crash - we just don't know when. But we do know things cannot continue like this for long. a world war with today's technology is what worries me cause everywhere I go I hear the chant "we need to go to war like we did in the great depression". We didn't come out of that depression till 1949 and that war left a lot of destruction and deaths in its path.

  2. Dave, excellent commentary as always.



  3. "this process of devaluation has actually been occurring since the start of the new millennium:" So maybe that whole Y2K scare was actually us catching cancer instead of the much hyped heart attack. Too bad it now looks terminal. Good thing I still have that hand crank 1999 radio.

  4. The problem with all these simplistic analysis is that they are divorced from the real world. The largest holder of US debt is Saudi Arabia. The war they are afraid of is “Saudi Royal Rulers Fear Obama -They eye potential US support for rebellion in Shiite oil region” Arab News.

    Again “A close aide to US President Barack Obama has warned the president about the imminent downfall of the ruling monarchy in Saudi Arabia. Bruce Riedel, an adviser on foreign policy to US President Barack Obama and also director for Near East and North African Affairs in the US National Security Council, recently penned a memorandum to the president noting that “Saudi Arabia is the world's last absolute monarchy” and that “like [France's] Louis XIV, King Abdullah has complete authority.”

    He wrote that the ongoing wave of "Awakening” is making a revolution possible in the Arab kingdom most probably during the second term in office of President Obama.”

    The fall of Saudi Arabia will lead to extinguishment of the largest US foreign debt holder. The US’s financial position is really not that bad as list of debtors in order is the Fed, then Saudi Arabia and then Japan and China and these have already been massively diluted.

    Furthermore the fall of Saudi Arabia will throw huge amounts of both paper and real gold onto the market as accounts will be closed off and gold holdings confiscated. Real gold will be extracted from the Princes to stop them being thrown to their own people so even the gold accounts can be squared.

    Of course the world and the middle east will look rather different after this fall but maybe that is good thing as the present system makes a mockery of global resource allocation.

    Gold bugs tend to insist that the world will be a repeat of 1973 and that gold as then will rise to the top of the pile. But there are other outcomes possible and it is foolish not to consider them. This is why I believe in silver not gold because it is a truly scarce metal with a currency element not generally hoarded by the Arabs except mixed with gold in jewelry.

    Chinese buy silver and this demand together with the solar demand could make the commodity truly scarce while gold might be completely undermined by the Middle East.

  5. Libor Lies Revealed in Rigging of $300 Trillion Benchmark

    Danziger typically would have swiveled in his chair, tapped White on the shoulder and relayed the request to him, people who worked on the trading floor say. Instead, as White was away that day, Danziger input the rate himself. There were no rules at RBS and other banks prohibiting derivatives traders, who stood to benefit from where Libor was set, from submitting the rate -- a flaw exploited by some traders to boost their bonuses.

    The next morning, RBS said it would have to pay 0.97 percent to borrow in yen for three months, up from 0.94 percent the previous day. The Edinburgh-based bank was the only one of 16 surveyed to raise its submission that day, inflating that day’s rate by one-fifth of a basis point, or 0.002 percent. On a $50 billion portfolio of interest-rate swaps, RBS could have gained as much as $250,000.

    Events like those that took place on RBS’s trading floor, across the road from Bishopsgate police station and Dirty Dicks, a 267-year-old pub, are at the heart of what is emerging as the biggest and longest-running scandal in banking history. Even in an era of financial deception -- of firms peddling bad mortgages, hedge-fund managers trading on inside information and banks laundering money for drug cartels and terrorists -- the manipulation of Libor stands out for its breadth and audacity.

    Details are only now revealing just how far-reaching the scam was.

    “Pretty much anything you could do to increase the revenue of your organization appeared legitimate,” says Martin Taylor, chief executive officer of London-based Barclays Plc from 1994 to 1998. “Here was the market doing something blatantly dishonest. I never imagined that people in the financial markets were saints, but you expect some moral standards.”

  6. Today the outspoken hedge fund manager out of Hong Kong, who recently lit the gold world on fire with his comments about a coming short squeeze in gold, told King World News that managed money around the world is already beginning to convert paper claims on gold into physical metal. Kaye, who 23 years ago worked for Goldman Sachs in mergers and acquisitions, and who is now the founder and principle shareholder of Pacific Group in Hong Kong, strongly believes that “... only a small fraction of investors in the world need to do what we are doing to create an enormous short squeeze (in gold).”

    KWN will be releasing a series of written interviews today with Kaye which discuss the coming global systemic meltdown, and how it will impact investors and key markets around the world, including gold and silver. Here is what Kaye had to say in part I of this exclusive interview: “We know the claims on gold in the marketplace exceed, depending on various estimates, 100 to 150 times the amount of physical gold known to exist. So when a credible country like Germany has sufficient concerns about whether they can get physical possession and safe storage of fully allocated gold, it’s our contention that any prudent investor should be concerned.”

  7. Great info Dave. I have a question. For the first time I see you mentioned Monex as a culprit of "fractional" bullion paper accounts. I'm very interested in your thoughts about them and why you say that. I am using them to store silver bars. Should I reconsider? I have at certain times, but get reassured that I own the bars outright, though, they are stored at the depository. Your insight would be very helpful. Thanks.

    1. There's also this:

    2. Get your bars delivered to your home and then figure out what to do with them.

      Their account where you put up money and get the leveraged return on gold or silver is a fractional scheme. I forget what they call it.

      I know two different people over the years who have had trouble getting delivery of the coins that are supposed to be in that account. They both eventually got them but it was like pulling teeth.

      Also, both of these guys used get calls a couple years ago begging them to sell them back some of the 1 oz. gold eagles they bought from Monex.

    3. The account is call "Atlas". You can leverage your purchase as much as 5:1. I have done it at times, but mostly own my bars outright. I believe I will take your advice. I was thinking of taking delivery and sending the bars to Quality Silver Bullion where they can convert them into rounds or bars. I would then take delivery. My one apprehension is that I've heard 1000oz bars may not be 1000oz. Thoughts? Thanks for taking the time. Keep up the great work!

    4. Actually, 1000 oz bars are what you want. That size is the global trading standard. Yes, the bars aren't necessarily exactly 1000 ozs. But the bars should be Comex eligible. Make sure Monex sends you the paperwork for bars, which should list the actual weight, serial number etc. Keep the 1000 oz bars rather than paying to have them broken down into rounds.

  8. Global Financial Meltdown

    Eric King: “The governments are running a Ponzi scheme. We have the insolvent financing the insolvent in Europe. This goes to your point that there is going to be another meltdown in front of us. What could set this (financial system) into meltdown mode?”

    Kaye: “All we need is for the Fed to live up to its promise that it has an exit strategy. I’m here to say that they don’t have an exit strategy. There isn’t an exit. A return to a normalization of interest rates, a withdrawal by the Fed and other central banks in their efforts to monetize debt and artificially suppress interest rates, as soon as that ceases, the system itself will freeze up just as it did a few years ago.

    The reason it will freeze up is the system can’t handle anything close to what would be considered historically normal interest rates. The stock of debt globally at that stage cannot be serviced. So the system, inevitably, will break down. The problem this time is likely to be much worse than it’s ever been in the past because the debt bubble has never been this big at any point in the past.”

  9. U.S. Mint Silver-Coin Sales in January Climb to a Record

    Sales of American Eagle silver coins this month by the U.S. Mint jumped to a record on demand for an alternative to currencies.

    Sales of the coins surged to 7.42 million ounces so far in January, the biggest monthly total since 1986, when the Mint began the transactions, Michael White, a spokesman, said in a telephone interview today.

    Silver prices in New York have more than doubled since 2008 as the Federal Reserve increased its balance sheet with debt purchases aimed at spurring an economic recovery. The central bank, which concludes a two-day meeting tomorrow, has pledged $85 billion in monthly bond buying in its latest round of stimulus measures.

  10. Hi, Dave. Any thoughts on silver? The open interest is unusually large. Despite the fall in the past 3 three trading days, the open interest still rests at around 149000. Meanwhile the eligible stock increased from around the 100000000 ounces of 2011 to 150000000 ounces now. I'm quite puzzled at the moment.

    1. You and everyone else is puzzled. The eligible category is supposed to be silver that investors safekeep in Comex warehouses. I would not trust them with my silver, however. The rise in inventory means more investors are taking delivery of their silver futures, assuming the Comex isn't playing accounting games with the physical. I sent these thoughts to Bill Murphy this past Saturday re: o/i:

      Two interesting observations: 1) most of the growth over the past year has been in the eligible inventory. I don't know if you've been following Ted Butler's analysis, but every report now pretty much he goes over the massive flows in and out of the Comex every week. This is something that didn't start occurring until about 4-6 months ago. He's convinced that it is direct evidence that it's a signal of how tight the physical market is. That combined with the SLV/HSBC reports is quite strong circumstantial evidence that SLV and the Comex eligible inventory is being used to put out physical "fires" on a weekly basis. 2) JPM has gone from not being silver vault custodian on the Comex about 18 months ago roughly to now being the third largest custodian. Given that is commonly accepted that JPM is the primary illegal Comex silver manipulator, combined with the fact that is the primary SLV custodian, can only lead one to conclude that JPM, the Comex and SLV are the heart of a massive scheme to cover up just how short the paper market is of physical silver. Just look at the inexplicable delivery to HSBC - the largest Comex silver custodian and no longer an SLV subcustodian - of $876 million worth of 1000 oz silver bars. Now the U.S. Mint and the Royal Canadian Mint are failing to meet the retail investor demand of physical silver. The difference between the Comex and the Mint business is that the mints have no choice but to either make hard physical deliveries or cut off orders. They are both cutting or limiting orders. When you put all of this together and stir it up it, the only conclusion is that the world is massively short physical silver delivery obligations. This is why the Comex long interest is staying so persistently high at the 140,000 contract level despite numerous aggressive cartel raids. We have never seen the silver open interest behave this way under such paper duress. There is a massive physical shortage of delivery obligations derived from the massive paper short, both Comex and OTC derivative based. There is going to be a huge explosion higher in the price of silver at some point in the near future.

    2. one more point about the Comex open interest. The true industrial and commercial users of physical silver, the commerical end users as opposed to the bullion banks who are also classified as "commercial," require physical delivery under any circumstances. It is my hunch and it is highly likely that the persistent high level of silver o/i could be attributed to the fact that the commercial end-users of physical stay long regardless of the paper raids. They need the silver to run their businesses. If we could determine if this is the case in terms of a detailed breakdown of the open interest, then my analysis is 100% correct.

  11. Two major Swiss banks nudge customers into allocated gold

    Swiss Banks Lose Old Taste for Gold

    By Jack Farchy
    Financial Times, London
    Tuesday, January 29, 2013

    The wealthy have for centuries turned to Switzerland as a safe and convenient place to stash their gold. But Swiss banks are now demanding higher fees to accept the world's bullion, as they seek to reduce the size of their balance sheets.

    UBS and Credit Suisse, which dominate the powerful Zurich-based physical gold market, have hiked their charges for holding the metal, according to clients and people familiar with the banks.

    The move is an attempt to persuade their biggest clients -- including other banks, hedge funds, and institutional investors -- to take direct ownership of their gold in so-called "allocated" accounts, with the bank simply acting as a custodian.

  12. I read a lot of economic breakdown on the web, and i always come back here for very clear, concise analysis. No spin, just say it the way you see it....
    Do you have a donation link?

    1. Thanks for the feedback - I appreciate it! My compensation is in the form of the mental therapy writing these posts give me lol

  13. Envelopes of Cash: Corruption Charges Put Madrid on Defensive

    New revelations about the corruption scandal that is rocking Spanish politics has put conservative Prime Minister Mariano Rajoy and his party on the defensive. Voters are beginning to lose patience.

    The powerful reacted the way powerful people react when they are in a tight spot. Former Prime Minister José María Aznar instructed his attorneys to sue the newspaper El País. Current Prime Minister Mariano Rajoy, a conservative like Aznar, threatened to sue anyone who leveled accusations at his People's Party (PP).

    For weeks, Spanish newspapers have published new details about one of the country's biggest ever corruption scandals, called "Gürtel affair," named in German after businessman Francisco Correa, whose last name means "belt". For years Correa allegedly bribed PP officials with money and gifts in return for public contracts.

    The general outline of the affair was known, but not the fact that the former treasurer of the People's Party, Luis Bárcenas, had amassed up to €22 million ($30 million) from dubious sources in accounts with Dresdner Bank in Geneva. The judge on the Spanish National Court only learned of this as a result of legal assistance from Switzerland. Even the conservative newspaper El Mundo could no longer refrain from delving into the scandal.

    For as long as Bárcenas managed the PP's finances, El Mundo writes, the politician handed party officials envelopes filled with banknotes worth between €5,000 and 15,000 every month. A former member of parliament for the PP confirmed this practice. Although accepting additional pay is not prohibited if a person declares it on his tax return, the conservatives are nonetheless worried. Bárcenas may have recorded the source of the funds in his notebooks (anonymous donations to political parties have been banned since 2007), as well as to whom the money was passed and why.

  14. India to bring back IIB's to keep investors away from Gold

    NEW DELHI(BullionStreet): India's central bank has decided to reintroduce the inflation-indexed bonds (IIBs) with slight changes and also to allow banks to buy back gold.

    The move is part of a series of efforts by authorities in the world's largest gold consumer to cut down imports and to keep investors away from gold.

    RBI governor D.Subbarao said the central bank had introduced IIBs some years ago but it did not take off due to some design flaws.

    The most important change is that both principal as well as the coupon rate on the bond will be indexed to inflation, he added.

    He however said some clarifications need to be addressed before the official launch such as which inflation index to be followed, wholesale price index-based inflation (WPI) or consumer price index-based inflation (CPI).

    how foolish....

  15. Lack of Criminal Prosecutions Linked to Obama and Holder's Wall St. Connections
    January 30, 2013

    Dimitri Lascaris: Department of Justice under George Bush secured convictions of major figures from the business community in complex financial frauds and Obama and Holder have not done so following the worst epidemic of financial fraud in the modern era.

  16. Lanny Breuer on Whistleblowers and Prosecuting Bankers (Liar Liar version)

  17. Manhattan real estate maintenance fees breaking the bank

    Monthly maintenance fees in Manhattan have soared to an average of $1.70 per square foot, meaning that a 1,200 square foot condo will cost you $2,000 a month in maintenance fees, on top of your mortgage, utilities and (usually) property taxes, according to CNBC.

    pretty steep

  18. Draghi’s Bank of Italy Knew of Monte Paschi Missteps in 2010.
    The Bank of Italy under former Governor Mario Draghi spotted accounting irregularities that allowed Banca Monte dei Paschi di Siena SpA to mask losses more than two years before the lender was forced to say it will have to restate profit.
    In 2010, “a problem came to light” on Monte Paschi’s booking of a structured deal called Santorini, Italy’s Rome- based central bank said in a report dated Jan. 28. The Bank of Italy alerted “other authorities” a year later and talks with those regulators, which it didn’t identify, haven’t concluded. It didn’t explain the delay in forcing the bank to disclose the information.

    The Bank of Italy’s account of Monte Paschi’s use of derivatives, released yesterday, calls into question its oversight of the world’s oldest bank, which is seeking the second taxpayer bailout in four years. Bloomberg News revealed the Santorini deal in an article on Jan. 17. Monte Paschi (BMPS) borrowed about 1.5 billion euros ($2 billion) in December 2008 from Deutsche Bank AG (DBK) as part of a derivative deal, dubbed Project Santorini, that helped it disguise losses. Hours after the Bloomberg report, Monte Paschi said it will conduct a “thorough” review of several structured deals to determine their effect on previous years’ accounts as well as any future impact.
    Draghi Role

    Draghi, 65, led the Bank of Italy from 2005 to 2011, when he left to succeed Jean-Claude Trichet, 70, at the helm of the European Central Bank. He has worked as an economics professor in Italy, a financial diplomat at the World Bank, a bureaucrat at his country’s Treasury and a banker at Goldman Sachs Group Inc. (GS) In December 2005, he was named to replace Italian central bank Governor Antonio Fazio, 76.

    Officials for the Bank of Italy didn’t have an immediate comment. Asked about Draghi’s role in overseeing Monte Paschi, an ECB spokeswoman declined to comment.
    Masking Loss
    Santorini helped Monte Paschi obscure a 367 million-euro loss from an older derivative contract with Deutsche Bank, according to more than 70 pages of documents outlining the deal and obtained by Bloomberg News. As part of the arrangement, the Italian lender made a losing bet on the value of the country’s government bonds. The bank’s new management is still trying to determine the extent to which Santorini and two other derivative deals were used to distort earnings.

    and ever other bank is clean if you believe in fairy tales.

  19. You wrote "The rise in inventory means more investors are taking delivery of their silver futures". Could you please explain more on this? If more investors were taking delivery of physical silver, then there would be violent movements in the registered silver category. However, the registered silver category remains a bit too calm, but the eligible silver category sees very big increases. Any thoughts on that?
    By the way, do you think the "silver basis" is useful for predicting the tightness of the physical market? Many people are pointing at the increase in the silver basis since last July to claim that the physical market is not so tight. Personally I don't think the silver basis concept is useful. What do you think?

    1. The registered silver is silver that is being kept at the Comex by investors. Of the bona fide investors, this is going to be investors who took delivery from their long position are "safekeeping" it at the Comex for whatever reason, not the least of which would be that they intend to sell it back on Comex via shorting futures.

      Now, it's Ted Butler's theory that the enormous daily/weekly movement of silver in and out of the Comex is a sign of market shortages. There can be a lot of reasons for this. I don't watch the daily inventor swings like he does, although Ed Steers Gold/Silver Daily reports on inventory changes every day and Ted Butler provides analysis of it in his bi-weekly subscription letter. Ted Butler has spent his professional career for the last 30 years studying all aspects of the silver market. No one understands it better than him, except for insiders are JP Morgan.

      I do know from observing the Comex warehouse inventories over the last 12 years that the amount of silver moving in and out over the last 4-6 months has been enormous relative to the last 11 1/2 years. Absolutely enormous. When silver moves in and out of eligible inventory, it means that it is physically loaded into trucks and shipped. You tell me what it means. I trust Ted Butler understands the dynamic better than you and me put together.

      My view - and it's shared by many with better insight than me - is that SLV/GLD are used to put out physical shortage fires. There's been quite a bit of movement and one rather large one last week/this week in and out of SLV. I believe BOTH the Comex inventory and the SLV inventory is used to fight delivery shortage fires.

      This is from Butler's Saturday issue: "One of the facts that favor silver is the relative tightness in the physical supply of silver versus gold. My prime indicator of wholesale physical silver tightness, the movement of metal into and out from the COMEX-approved silver warehouses, registered perhaps the most frantic turnover yet this week, despite it being a 4 day bank work week. More than 4 million oz came in and were shipped out this week, as total inventories rose less than 200,000 oz, to almost 152.3 million oz. Try as I might, I can come up with no more plausible explanation for the frenzied metal turnover than it being due to almost hand to mouth conditions in the wholesale supply chain. And the more I think about it, I don’t know if there could be a better indicator for a developing shortage."

      I would not keep silver at any Comex inventory. The Comex is a very corrupt beast. Our fund takes delivery of Comex silver but we specifically use a NON-Comex private depository in Delaware.

      In terms of the big increase in eligible silver, it's jumped up by like 40mm ozs in the last 9-12 months. Without delving into the cumbersome CME website to track the history of contract deliveries, I'm sure the bulk of that is easily explained by investors taking delivery.

      In terms of the silver basis question, I don't pay a lot of attention to the shape of the silver futures curve unless we go into periods of backwardation. Currently the curve is in contango. To be sure, if the enormous physical silver movements are being used fight shortage fires, then the manipulators can pre-empt the market from going into backwardation.

      The U.S./Canadian mint 1 oz coin delivery issues is probably a better signal right now than the silver futures curve.


  21. Gold Overlay Works As Currency Hedge In EM Currencies

    Hedging emerging market currency risk can be expensive because sometimes those markets are not very liquid and when price direction changes, it can be difficult to lift the hedges. Research by the World Gold Council released Thursday shows that gold can work as a partial hedge for emerging market currency risk.

    Their study showed that using a blend of a 50% gold overlay and 50% currency hedge can reduce portfolio drawdowns - or peak to valley declines - for investors with emerging market allocations relative to a foreign-exchange hedge. Gold also works as a way to reduce tail-risk – that is to help minimize losses during catastrophic events, their research showed. Also, since emerging market demand for gold is one of the reasons why gold prices have risen in the past 10 years, gold also offers some correlation to emerging market growth.

    The study was done from a U.S. dollar view, but the council said its findings are applicable to other foreign investments where higher borrowing costs make traditional currency hedging expensive.

    The sample portfolio tested had a 10% emerging markets exposure and no gold. The council looked at three strategies: one, an unhedged emerging market index (in U.S. dollar terms); two, a currency-hedged emerging-market index; and three, a hedging strategy split between 50/50 between a currency hedge and a gold overlay.

    The council’s previous research has show gold can play a role in long-term strategic allocations, with optimal ranges between 2% to 10%. So why do a study with gold as an overlay?

    Part of it was to show how the metal acts in a different setting, and specifically as a borrowed asset, said Juan Carlos Artigas, global head of investment research at the World Gold Council, in an interview with Kitco News.
    “We wanted to see how gold would act if you added exposure in a different way. As an overlay you add exposure by borrowing cash to do it. The net effect is similar,” he said.

    In the past several years, gold has been seen as an alternative currency by some investors and this research underlines that view. Also, Artigas said, for those not yet ready to embrace gold ownership, a gold overlay is one way to get familiar with its role.

    “For those who aren’t ready to put it in their portfolio, we wanted to show that gold works as a currency,” he said.


  23. Credit Supernova!

    Minsky’s concept, developed nearly a half century ago shortly after the explosive decoupling of the dollar from gold in 1971, was primarily a cyclically contained model which acknowledged recession and then rejuvenation once the system’s leverage had been reduced. That was then. He perhaps could not have imagined the hyperbolic, as opposed to linear, secular rise in U.S. credit creation that has occurred since as shown in Chart 1. (Patterns for other developed economies are similar.) While there has been cyclical delevering, it has always been mild – even during the Volcker era of 1979-81. When Minsky formulated his theory in the early 70s, credit outstanding in the U.S. totaled $3 trillion.† Today, at $56 trillion and counting, it is a monster that requires perpetually increasing amounts of fuel, a supernova star that expands and expands, yet, in the process begins to consume itself. Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result. Minsky’s Ponzi finance at the 2013 stage goes more and more to creditors and market speculators and less and less to the real economy. This “Credit New Normal” is entropic much like the physical universe and the “heat” or real growth that new credit now generates becomes less and less each year: 2% real growth now instead of an historical 3.5% over the past 50 years; likely even less as the future unfolds.

  24. The price of anything is the amount of life you exchange for it.
    - Henry David Thoreau

    Society is like a stew. If you don't stir it up every once in a while then a layer of scum floats to the top.
    - Edward Abbey

    When the rich wage war, it’s the poor who die.
    - Jean-Paul Sartre

    The Stock Market: Food Stamps for the 1%

    For most of the past four or five years, I have spent the majority of my time studying the dominant forces that fuel the power structure that exists in these Unites States today, and indeed throughout the world. My education began quite suddenly and unexpectedly in the middle of the last decade when I started understanding fiat money, Central Banking and the global monetary system. Since then, I have expanded my understanding to mainstream media brainwashing, the military-industrial complex, the role of the political oligarchs in Washington D.C., the corruption of the food industry under the complicity of the FDA itself and much more. The more I peered under the curtain, no matter what the industry, the clearer it became that the system had no chance of survival under its current form. What's worse, it became obvious that the very small 0.01% of the population that I call oligarchs (financial and political), who are actively gaming the system for their own pleasure, are well aware of the system's terminal nature. That’s why they are rapidly putting in place the police state grid.

  25. The Battle of Athens: Restoring the Rule of Law

    The Battle of Athens was an armed rebellion led by WWII veterans and citizens in Athens and Etowah, Tennessee, United States, against the tyrannical local government in August 1946.

  26. If Mankiw thinks looting is rational and is the top of his profession and faculty at the esteemed(?) Harvard, what makes people think the rest of the ethically challenged would tell the truth about the gold being unencumbered?

    Speech William K. Black at the Public Eye Awards 2013

    Sumners was from Harvard....think about it....

  27. The Fed has announced that it will continue bank bailouts on the black hole derivative debt that the banks have gotten themselves into. With BRIC countries pushing for a common currency, will we see a currency war come from this?

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  28. just think it is a example, i think everyone should have their own opinion.Guild wars 2 KEY

  29. Is it possible for the government to use both flexible and fixed exchange rates within the same economy? and if so,..what would be its effect on equilibrium income? thank you!!

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