Precious Metals in a World that is Flat, Fungible and Fiat
Ultimately, the global markets remain the battlefield in which investors compete for the last remaining quality collateral. Furthermore, secondary to Fed taper talk’s effect on the United States, is its impact on markets abroad.
As a case in point, the impact of the recently announced Fed QE taper plans on the exchange rate of emerging market currencies has been rather dramatic to say the least. The threat of tapering has sent shock waves across emerging markets seeing sharp crashes in the value of Indonesian and Indian currencies. Even the Mexican Peso has been hit substantially as hot money investors’ interest returns to Dollar assets.
For now the focus is on U.S. Treasuries and currencies, but this is only foreshadowing the upcoming rush into physical commodities —- whose market value remains hostage to false speculation and manipulation — the poster children of which are the precious metals.
Asian bond prices are also falling, and the last time they traded below par was after the Lehman bankruptcy. This all coincides with U.S. deficit funding, need reduction and repo collateral scarcity.
The Emerging Markets Currency Debacle and Silver
The failure of emerging market currencies like the Indian Rupee and the Indonesian Rupiah to gain support against the U.S. Dollar have been especially notable and this is having a marked effect on growth in those economies.
For its part, India is currently considering drastic measures aimed at supporting its currency the Rupee that has been under attack. The rupee fell 25 percent over the last few months as the flight to quality gathers steam after the Fed’s taper talk initially began.
Furthermore, even the Mexican Peso and the Brazilian Real have seen strong selling pressure emerge in the past few months, with the Peso’s exchange rate against the U.S. Dollar falling from 11.94 in May to a low of 13.47 seen in recent trading sessions.
This negative taper talk effect on emerging markets currencies seems to be another black swan event since it surprised the financial markets, had a substantial impact and has been rationalized in hindsight. Large funds and hot money investors have been scrambling to respond to the Fed’s taper talk as best they can.
Official Indian Attempts Backfire
The various official attempts by the Indian government to offset troubling Fed taper talk effects on its currency seem to be backfiring, adding fuel to the declines in other emerging market currencies like the Indonesian Rupiah as well.
Indian Plan A seemed to follow the status quo by blaming currency outflows on the Fed and speculators. When that failed to halt outflows from the Rupee, the response to something clearly going on was to initiate ‘capital controls’ on foreign exchange and tariffs on gold as Plan B.
Plan C attempted to confiscate people’s gold since the previous plans had not worked. The Indian government is now trying out their Plan D by ditching the U.S. Dollar for trade related payments, especially for oil that is up 50 percent in Rupee terms in just four months.
Collateral Wars Heat Up as Fiat Currencies Crumble
All fiat currencies are fungible forms of debt in that they are mutually interchangeable and can be readily exchanged for other fiat currencies. Furthermore, all paper currencies are intrinsically worthless fiat money at this point, backed only by the creditworthiness of their issuers instead of by hard collateral.
Emerging market currencies are a bit like a global version of the sub-prime debt market before the Lehman bankruptcy debacle. Investors were attracted to them by higher yields, but are now leaving in swarms.
The Fed also must start to taper its QE program or risk a serious threat to U.S. Dollar dominance as a reserve currency that could severely impact the ability of the United States to continue to borrow at cheap rates internationally.
Signs of financial fragility seem to be on the rise, and black swan events appear more abundant. World wars are even a possible threat, and an attack on Syria appears imminent. The reaction to the Indian currency crisis seems to be prompting even more crises.
Precious Metals Should Benefit From Fiat Currency Instability
Fiat currencies lack the hard collateral value of precious metals. Furthermore, the global financial system is quickly running out of collateral, hence signs of a growing gold shortage abound.
The new emerging market currency crisis also comes on the heels of horrible precious metals sentiment and virtually zero interest in the PM mining sector. Why is the mining sector important? Because mainstream investors “understand stocks better” than commodities, and they are not especially in touch with monetary and investment demand for these hard assets.
In addition, exerting more pressure on physical metals means putting even more artificial pressure on the paper futures exchanges that are already being questioned for being out of touch with the physical market’s reality of precious metal shortages. Ultimately, this disparity will be price positive for physical precious metals after the initial tapering talk shock wears off.
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