Currency Wars

Guest Post by Jesse

“As a delaying tactic, U.S. foreign exchange operations were often successful. They raised the potential costs of speculation and provided cover for unwanted, temporary, and ultimately reversible dollar flows. They delayed the drain of the U.S. gold stock. But to the extent that these devises substituted for more fundamental and necessary adjustments and postponed the inevitable collapse of Bretton Woods, they were a failure.”

Robert Wenzel, Cleveland Fed Accidentally Links to Paper Highly Critical of US Currency Market Interventions to Support Bretton Woods

When I said, and it already seems so long ago, that we had broken out with a higher high a few weeks ago, I cautioned that the markets had not suddenly become honest and transparent. and so caution was still advised.

And indeed, the breakout was stuffed, by the usual routine of dumping large amount of futures contracts at the market in thin trading hours, often on the open of the NY trading.

This is the currency war. This is the struggle we are seeing for the nations of the world to find a new way of arranging their international trading relationships. This is the fruit of Triffin’s Dilemma, which suggests that at some point if a single country manages the world’s reserve currency, eventually they will come to an impasse between their domestic interests and the interests of the rest of the world.

And after the failure of Bretton Woods, and the slowly destabilization of Bretton Woods II, we are now at a time of reckoning.

Some mistakenly think the dollar is rising now because of Triffin’s dilemma. This is really not the case, but rather a temporary policy choice by the US to allow the dollar to appreciate against the euro and the yen. Remembering that the US Dollar DX index is weighted to a certain group of currencies that reflects how things were earlier in the last century.

The US is fostering the myth that it is already past the worst of the financial crisis. A crisis, I might add, which its Banks largely promoted through their frauds, and the abuse of the dollar’s reserve currency status with the cooperation of the Federal Reserve and acquiescence of the regulators.

This transition is not going to be short, nor easy. And as for the precious metals, I have rarely seen so many who are so discouraged. They hear and see so many conflicting things that they do not know what to believe.

And losing money hurts, ESPECIALLY if you are using leverage and are overextended. Mining companies are levered plays on the precious metals, and the smaller the cap, the greater the leverage.

Timeframes also matter. I have been in this metals trade for a long time, but not because I like gold for itself. When I was looking seriously into international money issues and global trade, which was related to the communications business I was in, I came to believe that we were approaching a currency wars scenario.

It seemed pretty clear that the Dollar regime could not be sustained without the establishment of a very unipolar, de facto world governance, with perhaps two or three cooperating spheres of control. I had written a paper about this in B-School in 1991 (ok I was a late bloomer but as an classically educated engineering type pure business management course were not my thing). But my thinking really did not become firm enough to take action until around 2001.

And there is clearly a movement in the direction of a unipolar world, from the neo-cons and their associates. Money is power, and power is the new god of the marketplace in the West, if not everywhere.

So try to keep this in perspective. These are very difficult times for those seeking safe havens.  A major supplier of retail precious metals is publicly referring to a large number of their customers as ‘crazy’ even while there is a sea-change with central banks increasing their gold reserves (although it is clear the WGC is a bit blinded to China).   Fed President Richard Fisher owns quite a bit of gold.  Maybe he is crazy too.

I remember, quite vividly, gold being at $280 and silver at $4.70 and the prevailing wisdom amongst almost all the traders I knew was that the precious metals were ‘dead money.’ Seriously. You could barely find a buyer less than 20 years ago.

The truly big changes catch people flat-footed, because they run against the grain of what we knew yesterday. Most people are focused on the short term and the markets especially have come to take a very short term speculative bias.

I do not know what will happen in the future, and do not think for a minute that I do. We are all in God’s hands. But I am looking for any signs, based on my understanding of how certain things work, and over a 20 year timeframe it is pretty much on track.

Don’t be overly worried about these things that are beyond your control, or so fearful that you become preoccupied and distracted from your responsibilities and a righteous path. Rather, spend more of your time on things that you can control, and the things that will, in your waning days, loom most heavily on your conscience.