Friday, October 1, 2010

The Fight in Dollars

In September alone, the U.S. dollar was down 6% which is an annualized loss of 51%. This has led to big precious metals gains for the month as gold advanced 6% and silver soared 13%! The Federal Reserve has continued to monetize debt through permanent open market operations (POMOs) with dollar depreciation and asset inflation the result. But they are starting to get the attention of other nations in the fight over weaker currencies, and exports.

In the middle of September, the Bank of Japan had reached their limit when the Yen had risen to 82.80 versus the dollar and they decided to intervene in the currency markets. The yen dropped to 85 but has since reversed and is now trading at 83.30. Yesterday, Zero Hedge (another financial blog) reported that the Mexican government has intervened, and many other nations including Brazil, Peru and Colombia have also intervened to stem their currency appreciation. This, of course, comes on the heels of the fight between China and the U.S. over currency manipulation in which our own House of Representatives passed a bill that would raise tariffs on imports of a country artificially devaluing their currency. These are certainly dangerous waters to be surfing.

Brazil’s finance minister has blatantly stated that ‘we are in the midst of an international currency war’. And so far the United States has the upper hand as most international nations have clearly brought knives to a gun fight. That could very easily change though as these nations are major holders of Treasury debt. We sincerely hope that cooler heads prevail as trade wars were a big reason the recession of 1929 turned into the Great Depression. Since hope is not an investment strategy, we will gladly hold gold in our portfolio.