Currency Wars Update: Recession Time

Currency appreciation concept


By Jim Rickards

In describing the dynamics of currency wars, I consistently use metaphors such as a tug of war or seesaw. This is to indicate that currency wars are never a one-way bet. Exchange rates go back and forth repeatedly.

The currency war that lasted 1921–1936 is a good example. In 1921, the Germans destroyed their currency in the famous Weimar Republic hyperinflation.

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In 1925, France and Belgium devalued their currencies. That made British pounds sterling and the US dollar stronger.

In 1931, the UK struck back by devaluing pounds sterling. This put the pressure on France and the US.

Then, in 1933, the US devalued the dollar, putting pressure back on the UK and even more pressure on France. Finally, in 1936, France and the UK both devalued against the dollar again.

This was the infamous sequence of the ‘beggar thy neighbour’ devaluations.

Or consider the history of today’s currency war. We saw a weak Chinese yuan and strong dollar from 2008–2010.

Then in 2011, the US engineered a weak dollar. The Fed’s dollar index actually hit an all-time low in August 2011. At the same time, gold hit an all-time high — no coincidence there.

Next, the Japanese yen was cheapened under Abenomics beginning in December 2012.

By mid-2014, it was time to cheapen the euro, which crashed from $1.30 to $1.05 by January 2015. As a result, the dollar reached a 10 year high by mid-2015.

Then the Fed blinked and started to back away from rate increases, which took the dollar down a notch.

The point is there were no one-way bets. The US dollar got stronger from 1921–1933. Then it weakened from 1933–1936 and got stronger again after 1936. The dollar was also strong in 2010, weak in 2011 and strong again in 2015. The same analysis applies to the other major currencies.

That’s how currency wars play out.

The key to investing during currency wars is to focus on the underlying dynamics and stay nimble.

That’s exactly what we do.

The Gold Vaults Are Running Low, Here’s What Happens When They Run Out






By Joshua Krause


Someday in the near future, the process of buying a precious metal asset is going to look very different than it does today. Right now you can go online or step into a store and buy an ounce of gold or silver, and its price tag will reflect the price you see on the stock market. However, this may not be the case in the years ahead. There will be something fundamentally different about this transaction in the future.

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To understand what I’m talking about, you first have to look around and pay attention to the current events that are spelling it out. What these stories are saying, is that there is no longer any relationship between the price of physical gold and silver, and the price you see on the stock market. The value of these paper assets just keep falling month after month, and yet physical gold and silver sales keep breaking records.

On the surface it looks like the law of supply and demand has broken, when in reality, it’s working just fine. It makes sense once you realize that the relationship between these paper and physical assets is what’s really broken. This surge in demand that we’re seeing, is simply the result of people taking advantage of an artificially lowered price.

Take a look at what’s going on the silver market. The annual sale of silver eagles is about to break another record, even though prices haven’t been this low in 5 years. Meanwhile, demand for physical gold more than doubled in the United States last quarter, and increased by 33% globally. The media is acting like these stories are completely normal, as if it’s perfectly reasonable for demand to increase while prices fall. While it’s normal to sell more of any product when the price is set lower, it’s not normal for a slightly lower price to cause sales to double.

As for what’s causing this peculiar situation, well…

Without looking, you would never know that exchange inventories are falling – a combination of demand for physical bars and a dearth of sellers willing to furnish actual metals at the current price.

The natural dynamic is for prices to move higher, but the market has been completely overwhelmed by a huge increase in leverage. Unfortunately, there is no end to the supply of paper gold and silver contracts the trading exchanges will stack atop a shrinking layer of physical bars in their vaults.

The amount of paper gold has tripled relative to “registered” stocks available for actual delivery. This has happened in just the past few months. Just one ounce of registered gold now backs nearly 300 ounces in COMEX contracts (as depicted in a chart we re-published last week from

Stated another way, that’s razor thin coverage of just 0.0033. Trouble is brewing. About 1% of contract holders have been standing for delivery in recent years. So we could see requests to deliver 3 times more gold than is currently in the registered category in Exchange vaults.

comex-wharehouseIt’s almost hard to believe how much gold these vaults have lost. COMEX has lost 50% of its eligible and registered gold over the past 5 years. London’s LMBA, the largest gold exchange in the world, has lost 67% of its gold since 2011. JPMorgan Chase and Scotia Mocatta have lost 59% in just the past few months. All these bullion banks that supposedly influence the price of gold, have very little real gold on hand.

So how is this going to end? What happens when they run out, or even if they get very close to running out?

Let’s go back to what I said in the beginning. The way you buy gold and silver is going to change in a very big way in the future. Once those gold vaults are empty, your trip to the coin shop is going to look like this:

You: Hey there old timer. I hear that the market has bottomed out. Is it true? $800 for an ounce of gold?

Store Owner: It sure is! What can I do for you?

You: Do you have any of those 1/4 ounce gold coins? I’d like one of those.

Store Owner: No Problem. That’ll be $500.

You: Say what? Shouldn’t that be around 200$?

Store Owner: Well, you forgot about the spot price.

As the price falls, the naysayers will feel vindicated, and claim that the gold bugs were wrong all along. “Gold and silver are relics that have no business in the modern global economy” they’ll say. “These minerals are not money! Aside from a few industrial applications, they are little more than shiny rocks.” Presumably they’ll keep saying that until the price reaches zero, after the vaults are empty and the paper claims stack up to the ceiling.

Meanwhile, the price of real gold and silver will move in the exact opposite direction, and those who recognized the fact that paper is no substitute for the real thing, will have succeeded in preserving their wealth.