The Forex market may actually be seeing the beginning of the crack up boom where traditional currencies like silver and gold will naturally reassert themselves just as world monetary expansion begins to truly accelerate
The big shorts in the precious metals markets have acted as the governor, preventing the true expression of the paper currency value of real money for decades.
It seems to be no coincidence that their market dominance was enabled in large part by the luxury of interested parties enjoying cheap access to the world’s main reserve currency.
An Overview of the Recent Timeline
It seems relevant to review some of the recent historical events and circumstances that have brought the currency market to its present tenuous state.
The first factor to consider is the credit bust. For too many years, going back to the 1990’s, the Fed’s and other major central banks’ policies have incentivized leveraged speculation. This has fostered a massive inflation in the global pool of speculative finance that created situation where too much market-based liquidity or “money” has been chasing too few risk assets.
The second factor is the massive rise in monetary stimulus programs. One result of these huge quantitative easing and bailout packages is that unprecedented monetary creation is largely bypassing real economies on its way to creating bubbles in global securities markets.
The third factor is the realty of unbalanced government budgets. The recent U.S. government budget released showed an increase in spending, as the much-publicized debt ceiling limit is repeatedly increased and adherence to it postponed. Nevertheless, that ceiling was an important – albeit probably symbolic – gesture that telegraphed to the rest of the world there would be some limits to the huge debt already accumulated by the United States.
Finally, the recent banking crisis in Cyprus has provided the world with a template for the first direct bail-in, where bank investors and depositors help pay for its failure to operate in a commercially viable manner.
Global Monetary Expansion Continues
Japan recently announced further radical stimulus measures to help stimulate its flagging economy. This increasing trend toward boosting the Japanese money supply has resulted in a sharply weaker Yen, which has declined from a historic high of 75.55 Yen to the Dollar seen in October 2011 to a recent high of 99.94 touched on April 11th of this year.
Another remarkable event has been the parabolic rise in Bitcoin observed over the last few years, only to see the electronic currency crash hard in extremely volatile recent trading. The crash came in the wake of some recent Denial of Service attacks on Bitcoin’s primary dealing website Mt. Gox that handles roughly 80 percent of its market.
The prices of gold and silver have also been hit hard enough to break a key 38.2 percent Fibonacci retracement level that in turn provoked further technical selling. The sharp sell-off in the precious metals has conveniently allowed J.P. Morgan Chase to exit some of its concentrated short positions.
The Money Supply and Money Creation
Basically, the world’s stock of fiat money is not contracting – quite the opposite, in fact. Japan has just launched its ‘stimulus on steroids plan’, which will see the developed world’s most indebted economy create a proposed $1.4 trillion in Yen in a bid to break its economy free from depression and the questionable risk of deflation.
Nor is money creation in the West likely to subside, although earlier this month, the FOMC did hint that it might reduce its asset purchases later this year and that the committee was divided on the risks of continued super easy monetary policy.
Furthermore, current Bank of Canada governor Mark Carney’s departure to head the Bank of England is expected to result in a trend toward more activist monetary policy in the UK too.
Triple Forex – Money Cracking Up as a Reflection of Confidence.
On the world’s forex market, recent weakness in the commodity currencies like the Australian, Canadian and New Zealand Dollars has been noted in the wake of the remarkable sell-off in the precious metals seen over the past week.
These currency moves tend to highlight recent U.S. Dollar strength, more so than being a reflection of the recent commodity downdraft.Nevertheless, recent events may actually represent the last gasp of King Dollar, as inflationary U.S. monetary and budgetary policies continue to chip away at the value foundation of the world’s primary reserve currency.
Precious metals now appear to have found good support, with retail physical sales reportedly booming at the lower prices, despite heavy downward pressure exerted on the paper futures markets.
The use of barter also seems to be increasing in popularity as a method of value exchange, as people turn away from fiat currencies in droves. In addition, the recent out in Bitcoin prices, has drawn considerable media attention to the use of that electronic currency as an alternative medium of exchange to fiat currency.
Falling Prices May Accelerate Monetary Expansion
Falling commodity prices are simply another indication of failed policy that could well set the stage for a further acceleration in monetary expansion.
Speculative excess today encompasses all markets, with big money piled up on both the long and short sides of the financial markets.
Ultimately, it is the large shorts who seem to trigger the sell-offs in the commodities like silver and gold, probably so that they can cover their positions profitably.