Currency Crisis must lead to higher gold prices – Levenstein

According to David Levenstein, as prices rise, and the purchasing power of paper money declines, the relative purchasing power of gold will increase.

Despite the fact that the yen has dropped around 20% against the US dollar, sterling has lost around 10% against most other majors, the Venezuelan bolivar was recently devalued by more than 30% and the Swiss National Bank has already pledged to print as many francs as required to defend the 1.20 level against the euro, and the euro has gained 8.2% versus the dollar in the past six months, at the latest G-20 summit, IMF chief Christine Lagarde denied the existence of any currency war, labeling recent swings in the yen as “market reaction to exclusively internal decision making”.

After their two-day meeting in Moscow, and probably after patting each other on the back for the amazing work they have all done, G20 leaders agreed to a joint statement pledging that they would refrain from competitive devaluation and resist all forms of protectionism and keep markets open.

“We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes,” the G-20 financial leaders said in a closing statement after meeting in Moscow on Friday and Saturday.

While finance ministers and central bank governors promised not to devalue their currencies directly, not much was said about the effects their money printing habits are having on other currencies. It is precisely the ultra-loose monetary policy of the U.S. Federal Reserve, European Central Bank, the Bank of England and the Bank of Japan, aimed at helping their domestic economies to grow, that have sparked the whole competitive devaluation scenario.

Only a little more than a week ago, Venezuela devalued its bolivar by a whopping 32%.This is the fifth time in ten years that Venezuela has devalued its currency and despite the fact that it is a major oil producer.

While the measure is intended to help ease a shortage of dollars that has reduced imports and left many supermarkets barren of staples such as flour or sugar, it has sparked panic buying throughout Venezuela.  Domestic appliances such as fridges and cookers were in particularly high demand as Venezuelans snapped up goods imported at the now-defunct exchange rate of 4.3 bolivars per dollar. From now on they will be imported at 6.3 bolivars per dollar.

Venezuela has maintained exchange controls on the bolivar for a decade under which importers and travelers must seek dollars through a state currency board, or buy them on an illegal black market where greenbacks fetch nearly four times the official rate.

When a government devalues its currency, it benefits at the expense of its citizens. While any devaluation may help government finances by providing more of the domestic currency for each US dollar, it also increases the prices for imported goods thereby pushing inflation higher. As a consequence, ordinary citizens who have cash saved up suffer because any devaluation will reduce the purchasing power of their cash.

The point is, whether it is Argentina, Venezuela, Belarus, or Zimbabwe, in the end only the government benefits. Yet, on the other hand when a government devalues its currencies individuals holding gold will be fully protected.

Meanwhile, after nearly four years, billions in bailouts and increasingly strict austerity measures, the Eurozone debt crisis is no closer to resolution and the attempts to solve it are pushing the region deeper into recession.

According to Eurostat, the Gross Domestic Product (GDP) for the 17-nation Eurozone plunged 0.6% in the final quarter of 2012, a steeper drop than the 0.4% economists had expected and the worst decline since 2009.

It’s the third consecutive GDP decline for the Eurozone, reaffirming that the conditions in the region have only been exacerbated by the on-going Eurozone debt crisis. In 2012, the Eurozone economy shrank 0.5%, while the U.S. economy grew 2.2%. Even the GDP of beleaguered Japan increased 1.9%. What was of most concern was the GDP decline of 0.6% of the Eurozone’s largest and strongest economy, Germany. Apparently, Germany is slowly getting dragged down by its weak neighbours, which include Italy, Spain, Greece and even France.

While the Eurozone debt crisis itself is partly responsible for the region’s current economic woes, the austerity remedies designed to address it are more responsible for eviscerating economic growth, Money Morning Global Investing Strategist Martin Hutchinson explained.

“Much of this sluggishness is the result of government austerity having taken the form of tax increases rather than spending cuts – the latter are not necessarily recession-producing, the former are,” Hutchinson said.

Unless the governments in the most troubled Eurozone countries back off from the crippling tax increases, the economies in the region will continue to shrink.

While some economists see a Eurozone recovery starting later in 2013, the reality of continued weakness has convinced others to lower expectations.

In the US, and despite rising prices of most equities, there has been very little real improvement in the overall economy. Frankly, I don’t see any improvement at all. The total number of food stamp recipients as of November was 47.7 million, an increase of 141,000 from October. And, the total of US households on food stamps just hit an all-time record of 23,017,768, an increase of 73,952 from the previous month. Surely, if there is some economic recovery and less people are unemployed, the number of people receiving food-stamps should be less. I suppose it depends on what figures one wants to believe.

The Japanese economy also contracted by 0.4% on an annualized basis in the fourth quarter 2012, registering its third straight quarter of contraction. The result was particularly disappointing since the Japanese yen, which has fallen 20% against the US dollar since October, making the country’s exports more attractive to foreign buyers.

Before the latest G-20 meeting, Brazilian Finance Minister Guido Mantega told Reuters European countries should focus on reviving their economies with more investments, rather than trying to weaken the euro to protect jobs.

“We will continue to have this currency problem unless the global economy takes off,” Mantega said.

More than two years ago, Mantega, used the term “currency wars” to describe the series of competitive devaluations adopted by rich nations to bolster their exports amid the global slowdown to the detriment of emerging market nations.

Since then Brazil has actively sought to depreciate its currency, the real, to protect local manufacturers of everything from shoes to suits and make its exports more competitive.

While global leaders and main stream media suggest the worst is over, and as asset prices continue to be artificially inflated, true statistics tell a different story. The expansionary monetary policies of the major central banks have clearly failed to stimulate any economic growth, unemployment remains at elevated levels, political tensions are increasing, and general unrest around the world is on the rise. Now, as central banks attempt to generate economic growth by debasing their respective currencies, I believe that this will also fail and in the process cause more misery to individuals around the world.

As prices rise, and the purchasing power of your paper money declines, the relative purchasing power of gold will increase. So, while prices may dip in the short-term, don’t be fooled into believing the worst is over. It is still to come.

Even though gold has not performed in a way one would think it should considering the above scenario, it is only a matter of time before prices rebound and re-test previous highs. I believe that the current prices represent another major buying opportunity.



Gold prices have breached the support at $1640/oz. but have held above the $1600/oz. level. The price is now entering oversold territory and so I expect a bounce out of here.


About the author

 David Levenstein began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

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