How gold fits into yet another chapter of the perennial currency wars saga that erodes the purchasing power of your dollars.
No one expected something this dramatic when the European Central Bank (ECB) held its monthly meeting Thursday. The bank cut its interest rates to the bone and started its own version of Quantitative Easing to fend off the threat of deflation and stimulate the ailing Eurozone economy.
As the dramatic monetary move by the ECB sent the euro’s value downward, gold prices on Friday moved slightly higher.
Banks typically make money on the cash they keep in central banks. But since June this year, the ECB has been charging them for the privilege – a so-called negative interest rate. The central bank has been also giving out cheap bank loans in order to send strong message to investors, businesses and consumers that it is determined to do whatever it takes to save the sagging European economy, including a significant devaluation of the euro.
Now the ECB is using the axe for a second time in three months, slashing interest rates to a record low, from 0.15% to 0.05%. Couple that with their own asset purchase program to match the Fed’s Quantitative Easing and we’re likely to see the euro’s value against the dollar begin to decline.
The Fed’s reaction to a cheaper euro will likely be another weakening of the dollar. Why? Because of the global currency wars being waged right now – the never-ending race to the bottom in which gold will likely again prove to be one of the few reasonable means for storing value.
As opposed to ordinary citizens, no central bank or government wants a strong currency. Central banks serve the interest of governments, and governments serve the interests of corporations whose profits come from exports. To make money from exports, you need a cheap currency – not to mention that weak money lowers your labor costs. Think they really care that the American worker will have lower buying power for groceries?
China has been notorious for keeping its currency, the yuan, undervalued so that it can continue to churn out cheap products and protect its place as the world’s top exporter. Of course, many European nations, such as France and Italy, also want to boost their exports. So their governments must be jumping for joy at the prospects of cheaper euro.
Ultimately, it comes to this: The Fed and the ECB use their currencies as debt instruments, manipulating their value as they choose, whenever they choose. But of course they can’t print more gold – the only asset to stand the test of time. So when you’re ready to shield some of your savings from the ongoing currency race to the bottom and the wealth erosion that comes with it, we’ll be here to help.
Image by JIP