Venezuela devalued their currency, the Bolivar, by nearly 50% on Friday and it now looks like Egypt will be next. The story in the Financial Times is headlined “Venezuelan devaluation sparks panic.” I read the article and was surprised at the content because when I read the headline I was fooled. OF COURSE the Venezuelans are in a panic, they just lost nearly 50% of their purchasing power over one evening. The “panic” that I thought would have been written about was “who’s next?”
This is merely a small chapter in the current global currency war. The funny thing is that these mainstream writers are gauging the “devaluation” versus the Dollar when in fact it is the U.S. who is working the hardest at devaluing. Zerohedge wrote yesterday that Russia has been exporting oil and buying Gold for years …because they know! They know that the U.S. Dollar will be devalued at some point much harder and faster than it already has been.
The same goes for China who is now THE largest trading entity on the planet because they also know. Why do you think that the Chinese have structured deal after deal to purchase assets in Dollars? Why do you think that they have structured trade deals in Yuan? They want to take in less Dollars and spend as many as they can before this thing goes terminal. They are simply illustrating how to play the game of hot potato! Don’t get me wrong, I know that China has blown its own bubble with debt and an exploding money supply but they are novices compared to what we’ve done.
As my title implies, the world should get used to devaluations. They will now come more often and with deeper cuts because of what has happened and the responses by central banks over the last 5 years. The world (central banks) has collectively jumped head first into papering over the paper problems with more and more paper. What began as a solvency problem has been remedied as a liquidity problem which worsened debt ratios and watered down the currencies… until… everyone is forced to devalue versus Gold.
While on the topic of “devaluation,” I think I may have an idea as to why the “lock down” of the metals over the last 3 months or more. Obviously the “lid” needs to be kept on the metals as behind the scenes we know things are getting messier. I believe that the powers that be are “tapping on the brake” as opposed to the way they used to operate. They used to go for 20% or more drops to shake the weak hands out. I don’t believe that is possible now. Here is why: We know that physical demand is quite strong as evidenced by the U.S. Mint figures and investors are now reacting differently to any big drops. In the past, many investors would freeze, now they are looking for entry points rather than exits. Yes I know, the sentiment is awful and everyone is moaning and groaning but a $100 or $200 drop in Gold or $3 in Silver is bringing new buyers out of the wood work.
Think of it this way; by not allowing a price rise and also not pressing your hand to the downside it is not creating any emotion or urgency to buy… now. Yes it is irritating the long term holders but the lack of movement has taken gold and silver out of the spotlight. This way, anyone looking to buy on dips or “trend followers” chasing an uptrend are basically made to sit on their hands. Maybe I am wrong in this thought process but it seems to fit AND is the best strategy available in my opinion. Lock the price down, keep whacking it often and steadily to make as few emotional waves as possible. For long term holders of metal assets this is like Chinese water torture but once this changes the supply demand equation will go ballistic. As I have said all along, “Either you are in or you’re out. When the music stops, you will not be able to correct or better your position.” If you have not positioned yourself yet, use the current calm before the inevitable storm. You will need to be prepared to ride out whatever comes… with whatever you entered with.