Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The Central Bank Time Machine - 23rd Aug 19
Stock Market August Breakdown Prediction and Analysis - 23rd Aug 19
U.S. To “Drown The World” In Oil - 23rd Aug 19
Modern Monetary Theory Could Destroy America - 23rd Aug 19
Seven Key Words That Explain "Stupidly High" Bond Market Prices - 23rd Aug 19
Is the Fed Too Late Prevent A US Housing Bear Market? - 23rd Aug 19
Manchester Airport FREE Drop Off Area Service at JetParks 1 - Video - 23rd Aug 19
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
WAYS TO SECURE YOUR FINANCIAL FUTURE - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

Gold Will be Driven to Dizzying Heights by Green Energy and Healthcare Reform

Commodities / Gold & Silver 2009 Oct 16, 2009 - 11:35 AM GMT

By: Q1_Publishing

Commodities

Best Financial Markets Analysis ArticleWarren Buffett calls it “a drug.”

Ireland’s finance minister calls it “a weapon.”

It’s one of the ultimate temptations for politicians.


And, quite frankly, we’re about to see a lot more of it.

Best of all though, the market is rewarding investors who have taken steps to protect themselves and profit from it.
I’m talking about currency devaluation. But this time around though, we’re not looking at your average currency devaluation though. We’re looking at a much slipperier slope that is more dangerous, more costly (if you’re not prepared), and that will only get worse in the months and years ahead – competitive devaluation.

And if you’re not prepared, get prepared now.

Get a Little Now, Pay a Lot Later

Currency devaluation is pretty simple. It’s when a country’s government or central bank intentionally cuts the value of its own currency. The goal of devaluation is to make exports cheaper.

For instance, Japan let the value of the yen drop precipitously during the 2002 recession. In one period, the yen fell 7% (that’s a huge move in currencies) relative to the US dollar. The move made exports 7% cheaper and was a clear example of how Japan’s leaders were hoping consumers elsewhere would be able to jumpstart its economy.

The benefits of currency devaluation include temporary increases in manufacturing activity and employment. They are loved by politicians who are often looking towards the next election, not the long-run health of the economy.

The costs of currency devaluation are many. Basically, if your currency is worth less, you can buy less stuff. For instance, the immediate impact of devaluation can be seen in commodity prices. When commodity prices go up they make the price of the inputs of manufactured goods like copper for refrigerators, steel for buildings, etc. more expensive. Also, devaluing your own currency is a direct way of subsidizing another country’s consumption.

Basically, currency devaluation is a zero-sum game - you don’t get something for nothing. And the short-term benefits don’t really outweigh the long-term costs.

The Race to the Bottom

What we’re on the potential verge of here is competitive devaluation. That’s when every country (or economic area like the Eurozone) looks to devalue their own currencies. The thing is though, not every central bank can devalue their currencies at the same time.  So there has to be some other alternative.

Lately, that alternative has been commodities.  That’s why gold has been setting new highs. Silver has been rising even faster than gold.

And currencies from countries which produce a lot of commodities like Canadian and Australian dollars and the Brazilian real have been jumping higher against the U.S. dollar too.

Regretfully, it’s only going to get worse from here.

You see, the most politically appetizing benefit of currency devaluation is the initial jolt of employment. A sharp upturn in exports means more people will be working to produce those exports. And with official unemployment in the U.S. nearing 10% we’re witnessing the politically-welcomed devaluation of the dollar right now. Economist Simon Johnson has gone as far as calling the devaluation “Obama’s secret jobs plan.”

Worst of all, the political will to devalue the US dollar is only going to get stronger from here because unemployment will continue to be a problem thanks in large part to healthcare reform and the goal of green job creation.

The Biggest Losers in Healthcare “Reform”

All of the healthcare bills on the table have apply fees, penalties, mandates, and/or taxes. Some tax medical device companies, others go after insurance companies, and others hit employers with mandates and/or penalties.

As a result, all the bills will do one thing: increase the cost of employment.

That will lead to higher structural unemployment. It’s simple supply and demand. If the price of something goes up, quantity demanded will decline. It’s true for guns, butter, and labor.

Some opponents have called the bills “job killers” (or worse), but it will be more like job preventers. And with unemployment already high, the quick and politically painless solution will be to devalue the currency.

The Other Side of “Green Jobs”

It doesn’t stop there. The other major legislation staring the economy down is the cap-and-trade scheme. Again, we’re not here to debate the scientific or political merits of global warming climate change. We’re here to look at the impact of the plan on business, the economy, and our investments.

If cap-and-trade is eventually passed, it will have the same effect as healthcare reform: increase the cost of employment.

Those increased employment costs will inevitably lead to - wait for it - even higher structural unemployment.

This is not a theory though. Spain has already been down the “cap-and-trade” road and they don’t like where it has taken them.
Back in March the King Juan Carlos University published a study on the country’s cap-and-trade system and job creation. The study found 2.2 jobs were lost for every one green job created.

Sure, you will have a few thousand folks who work in windmill and solar panel factories (and they’ll make great backdrops for presidential speeches). And the lack of tangibility of jobs lost make green jobs very politically favorable. But the transfer of wealth from some businesses to other less-efficient ones will just add to unemployment rolls here just like it has in Spain and everywhere else.

In the end, the net effect will be higher unemployment. And the politically favorable “quick fix” will be - you guessed it – more currency devaluation.

Run for Cover and Profit

That’s why we should expect more devaluation of the US dollar in the future.

This is a sharp contrast to the past. Over the last few decades, a lot of countries have gone down the devaluation road for the sake of higher employment. Meanwhile, the U.S. gladly maintained its “strong dollar policy” which allowed the central banks to essentially subsidize U.S. consumption.

The U.S. has tried devaluation in the past. For instance, when President Nixon removed the U.S. from the gold standard and openly devalued the dollar, the greenback went on to lose 75% of its value in the next decade.

Right now, all signs point to us heading down a similar 70’s-style stagflationary path. And although the politicians and pundits may say “it’s different this time,” there’s no reason to expect it to be any different.

It’s already started to happen. The US dollar index is down 16% from its March highs and the Fed has not come out and said it’s going to defend the dollar. Also, Britain’s central banker has deemed any further devaluation of the pound to be “helpful.”That’s why gold and silver have done so well lately. And the future is looking even brighter. They were, are, and will likely continue to be a few of the best places to protect yourself from the long-run impacts of dollar devaluation ($200 oil and GDP growth of 1% anyone?).

This is something we follow closely in the Prosperity Dispatch. To stay current on this subject and more, subscribe today!

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Q1 Publishing Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules