Tuesday, October 25, 2016

As the dollar strengthens and the Yuan weakens, China continues its heavy buying spree of physical gold in expectation of financial crisis

Six years ago, the Middle East erupted into protests that would become known as the Arab Spring.  And while politicians in the U.S. tried to spin this event as being a revolt against 'tyrannical governments', the reality was that these and many other nations were in bondage to a stronger dollar which made it impossible for them to afford to buy wheat and other commodities to feed their people at the height of the Great Recession.

With the U.S. dollar being the sole reserve currency in which all nations must exchange their money into to be able to purchase commodities on the international market, extreme changes to the dollar have historically been the catalyst for monetary crises elsewhere.  And two of the best examples occurred in both the 1980's and 1990's when Paul Volker's interest rate hike led to a Latin American debt crisis, and the stronger dollar during the height of the Dot.com boom triggered a currency crisis in Southeast Asia.

The U.S. dollar is getting too strong for some countries. Early warning signs suggest another emerging markets currency crisis. 
Currencies in Southeast Asia are at their worst points since the region's last financial crisis in the late 1990s. Mexico and South Africa's exchange rates are at their lowest levels ever compared to the dollar, according to Capital Economics. 
The dollar's gains should make history nerds shake in their boots. Its rally in the early 1980s helped trigger Latin America's debt crisis. Fifteen years later, the greenback surged quickly again, causing Southeast Asian economies, such as Thailand, to collapse after a run on the banks ensued. 
A large scale currency crisis could be a real hit to the global economy, even the United States. The world is a lot more integrated today than it was in the 1980s and 1990s. – Money.CNN
However, unlike the way the strong dollar effected currencies in second and third world economies two and three decades ago, this new move for the dollar over the past six months is causing financial problems to first world nations such as the UK, the Eurozone, and even the second largest economy in the world, China.


In response to this, China is once again ramping up their gold buying, especially since the price was slammed down by over $70 earlier this month.  And in addition to the latest report of over $350 billion in U.S. Treasuries being sold back to the United States over the past few months, those dollar reserves are in part the currency being used to swallow up Western gold supplies.


As the dollar once again nears 100 on the weighted index, and the British Pound, Chinese Yuan, and Euro all devalue to in some cases historic levels, the chances of another regional or global monetary crisis comes to the fore, and unfortunately at a time when the world looks to already be in a new economic recession.

0 comments:

Post a Comment