The worldwide tug of war between the world’s major central banks has created a de facto currency war involving the competitive devaluations of major fiat currencies.
The move to debase national and multi-nation currencies like the Euro in virtually every major economy has fueled fear about reducing the standard of living and real wealth of everyone affected.
Risk On, Risk Off
In today’s artificially inflated economies, and from an investment standpoint, we exist in a world of “risk on, risk off” or RORO. In the currency, stock and precious metals markets, “risk on” will generally signal a flight to “risk assets”.
The misnamed risk assets, while representing real wealth like precious metals, also include fiat currencies from countries such as
Canada, Australia and the Euro.
The opposite of “risk assets” is a category ironically made up of U.S. Dollar denominated “assets”. The misnomer is intentional, since real risk is inherent in a currency of a country with a debt to GDP ratio of over 100 percent, like the United States, and where every dollar printed by the privately owned Federal Reserve Bank represents debt.
This risk on, risk off policy is structured to protect the interests of the wealthiest one percent and provide adequate cover for the banking institutions that prey on the populace. The policy effectively prevents deflation and places more of a burden on defaults.
Inflation and Deflation
Even though deflation is prevented through the risk on, risk off policies, swings toward deflation in a country as its economy suffers will tend to put downward pressure on precious metals prices expressed in that nation’s currency. The reverse is true with inflation.
As inflation increases, precious metals prices tend to increase in the country experiencing inflation. The key to precious metals pricing is in the currency it is priced in. For example, gold prices expressed in Japanese Yen may appear to be in a bubble or at mania levels, especially given the massive amount of quantitative easing and other stimulus measures unleashed by the Bank of Japan.
The dilemma exists in the combination of easing measures with price manipulation. Price action drives commentary, which helps form market sentiment. Manipulation leads to artificially induced volatility, which not only diminishes the “natural” role played by precious metals as a hedge against money printing, but it also creates a darkened sentiment, which confirms faulty beliefs about the otherwise intact fundamentals that should be the main determinants of price.
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