Currencies Break, Gold Price Not

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With credit markets in Europe and the US taking a bit of a pause for profit-taking or reassessment, it is notable that currencies have not. The euro finally broke free of what looked like a steady range, though unfortunately to the downside. While that may be celebrated by orthodox economists in Brussels and elsewhere, it should not as such devaluation has led to no place good in the recent past.

euro_dollar_march_2009_august_2014

While they continue to “fish” for economic growth via debasement, they should be looking to Japan for a realistic assessment of just how much worse such interference and instability makes economic function.

The yen too has broken free of its range, curiously for much the same reasons. The lack of actual economic progress (really, like Europe, expectations for progress, even diminished, are now being downshifted further to nothing more than hope it doesn’t outright deteriorate significantly from here) has “markets” looking for the “easy” way out. Currency intrusion seems to be the path of least resistance for central banks and their central planning, yet it may actually be the most poisonous of prescriptions.

yen_dollar_january_2014_august_2014

The yen has touched a low against the dollar last seen at the outset of 2014 when expectations for further QQE were highest. With the currency now breaking out of what was a very steady trend, Japan is actually courting very real danger and not just from the same impoverishment that it has undertaken since Abe took office. At some point, Japan’s currency will not be “worth” the claims it supposedly represents, and when that happens investors no longer will hold the currency and attempt to exchange that derivative claim to something more like real property – underlying Japanese assets themselves.

This is a kind of parallel to Gresham’s Law written into the fabric of a currency collapse. Such a trend need not be hyperinflationary, but it is always preceded by economic distress that stubbornly remains despite ever-increasing means to displace it.

That, too, binds the yen and the euro, as the euro cross with the Swiss franc touched a low not seen since November 2012. Again, that occurred last week while bond markets were retracing dramatic flatness and spread compressions (swaps).

swissfranc_euro_january_2010_august_2014

There isn’t much deeper analysis to be had at this point, only that with such major crosses now outside their “comfortable” ranges of late there is a distinct elevation in both risk and uncertainty (the two, obviously, related).

Curiously, however, the ultimate indicator of such risk, gold, has remained in its rut while these other pieces notoriously shed such contented framing.

gold_prices_february_2014_august_2014

The $1,300 level still looks like the relevant anchor or really axis by which gold prices are gyrating. I still believe that at some point prices here will begin to react to such apprehension as displayed by currencies now exiting toward more unknown terrain. Given the state of complacency, maybe it makes sense that more is “needed” before uncertainty turns toward fear. Central banks have been at least “successful” in that respect, though these latest developments are very real erosions of faith that such was lasting, or even real.

 

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