Currency Survival In The European Debt Crisis

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European marketsWhat has been perhaps the most significant factor in the European Debt Crisis for the currencies markets has not been the actual event itself, but the reaction of global central bankers. The rounds of quantitative easing that have been used to combat falling asset prices have engendered profound consequences not previously considered. Certainly among those roiling the markets has been the detachment of gold from its traditional link to fiat currencies.

Legendary investor Jim Rogers has stated that a weak currency is a sign of a weak economy, which is a sign of a weak government. What this means for the markets is that when a currency is devalued by its government, there should be a rise in the price of safe haven assets as investors flee the paper money that is expected by traders to be losing value due to the expectations of higher inflation in the future. As a result, gold should rise when there is massive currency creation without supporting economic growth, as has been transpiring since quantitative easing was initiated years ago by European central bankers in conjunction with the efforts across The Pond of Federal Reserve Chairman Ben Bernanke

For the previous rounds of quantitative easing, gold, silver and other precious metals, soared as fiat currencies plunged. Not only did monetary units fall in value as commodities surged, both the United States and the United Kingdom, at different times, were downgraded as a credit risk. Due to the current gridlock in Washington, DC, the United States has been threatened with yet another downgrade by the credit agencies after its first in August 2011.

Rather than jumping in value, gold has fallen since late last year. In recent market action, the Yellow Metal went below the important barrier of $1600.00 an ounce. Needless to say, other precious metal prices have followed along: the exchange traded fund for silver (SLV) is down for the last week, month, quarter, six months and year of year of trading. For 2013, the SLV is off by 5.24%. Over the same period, the exchange traded fund for gold (GLD) has declined by 5.59%.

There is little logic behind this as more than 90% of gold is used for speculative purposes while about half of silver goes to industrial end uses for products such as solar panels and dental fixtures.

As a result of the massive amounts of liquidity being created by the central banks of Europe and others in response to the debt crisis, for which there is no end is sight, the traditional speculative positions in gold, silver and other precious metals have been overwhelmed. The sheer volume of liquidity being created from the trillions in paper currencies being printed is far too great for the precious metal markets to absorb.

From this, investment capital is flowing to the only financial markets with the depth to accommodate the massive quantities: the currencies of the very governments undertaking the actions that should be devaluing the paper money of its domains. Instead, fiat currencies are rising in value as investment capital is flowing into these financial vehicles as the depth of the market is being sought rather than the return.

Also adding to this has been the creation and perpetuation of the low interest environment. That has naturally resulted in a yield-seeking investment community. This also lessens the appeal of the Yellow Metal, the Silver Metal, and other precious metals that have historically risen when massive amounts of currencies were created.

Instead, dividend paying stocks and other securities such as junk bonds have become very popular. Assets once considered to be “toxic” during the Great Recession that could only find a home on the balance sheet of a central banker have been selling at a premium as evinced by the disposition of the Maiden Lane portfolio held by the United States Federal Reserve.

But it is most demonstrated by the relationship of the Euro to gold since last August, as the Euro fell after the announcement of Quantitative Easing III in mid-September 2012.

But gold has fallen since in peak from the run-up to a post QEIII surge. Despite a host of bearish economic news from Europe that manifest the Debt Crisis is nowhere near over, gold has plunged as the Euro rose since August. Clearly the massive infusion of capital into the global financial system is keeping interest rates low and moving beyond the limits of traders to profitably allocate the funds into speculative positions.

Now the Euro Debt Crisis has precious metals low and the Euro higher since the positioning by speculators before the QEIII announcement took place in August. That has since the Dow Jones Industrial Average along with the Euro and other currencies. At this stage, central banker response to the European Debt Crisis has resulted in the triumph of currencies over commodities.

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Anna Timone (195 Posts)

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