By Chris Weber
Contributing Writer
Money Morning
When rumors of the Swiss central bank again intervening to drive down the value of the Swiss franc hit the world’s currency trading desks late last week, it underscored just how hard global governments are fighting against the strong currencies that can derail exports while also blunting consumer demand at home.
In fact, in the face of a stagnant world economy unrivaled since the Great Depression, we’re now looking at an era of competitive currency devaluations - where every country tries to keep its own currency from rising too much.
Far too many investors are either unaware of these efforts, or dismiss these currency strategies as bureaucratic wrangling. But I’ve been watching this unfold for the past eight years, and have made a significant amount of money from this insight.
And there’s still a substantial profit to be made - for those who understand just what’s happening.
When Strength Leads to Weakness
Since about 2001, whenever any currency rises too much, the local manufacturers or farmers - or anyone who lives by exporting - start to scream about it. Their local governments respond by doing all they can to lower the value of that currency, having it fall in value and thus making exports cheaper - all this in the hope that the domestic economy will become better.
Pick any period so far in this young century and you’ll see that this is true. For instance, right now you see it in those countries whose currencies have soared the most in the last few months.
Let’s focus on the recent highest-flying currencies. The New Zealand dollar soared 23.6% against the U.S. dollar from mid-March through mid-June. That’s the best three-month performance for the Kiwi dollar since way back in 1971, when currencies began floating against each other.
And over 2009, as a whole so far, the strongest currency has been the South African rand, which has soared 18.3% against the dollar since Jan.1, the best performer of all the 16 major currencies. Other currencies that have been strong have been the Norwegian krone and the Canadian dollar (both
up 13% since 2009 began) and the Australian dollar (up 14.6%).
It should be no surprise that all these countries have been making noises and taking action to try to reverse that trend. Take New Zealand. This is a country that depends on exports, especially agricultural exports. Total export prices have plunged 8.2% from 2008’s last quarter to 2009’s first quarter. This is not an annualized rate, either, but a quarter-to-quarter drop. If continued at that rate, it would mean a 33% fall in export income over the year. According to Fonterra Co-operative Group Ltd., the world’s largest dairy exporter, New Zealand farmers have suffered a 12% drop in milk prices over the last few weeks. The dairy industry accounts for 20% of New Zealand’s export earnings.
As The New Zealand Herald stated in an article on June 16: "That (the plunge in income for New Zealand dairy producers) explains why Reserve Bank Governor Alan Bollard (New Zealand’s counterpart to U.S. Federal Reserve Chairman Ben S. Bernanke) last week called the exchange rate rise against the U.S. dollar ‘unhelpful’ and a ‘real risk to us‘ as the country endures the deepest recession in three decades."
The same article goes on to quote the head of the New Zealand Manufacturers and Exporters Association, John Walley: "We don’t see any green shoots in our markets both at home and abroad. And the high exchange rate is strangling any ’shoots’ that are poking their heads up."
The New Zealand monetary authorities are doing all they can do cheapen their dollar. That includes slashing interest rates to just 2.5%, which is a shock to those of us who remember Kiwi interest rates as being the highest in the world. They are printing money and talking about actively intervening in the currency markets to sell their dollar short. New Zealand’s finance minister, Bill English, just came right out and said that his government would prefer a weaker currency.
I could go on and on. The Australian treasury secretary, Ken Henry, just announced, in language as radical as finance ministers usually get: “If today’s high exchange rates continue, that would imply downside risk to the economy."
However, I don’t sense as grave concern at the rise of the Aussie dollar as I do with the people of New Zealand about their currency. Thus, it would not surprise me to see the Kiwi fall versus the Aussie, or, put another way, the Aussie falling less than the Kiwi.
Additional Global Currency Concerns
Moving on to Canada, we see that its central bank just announced that the "unprecedentedly rapid rise" of the Canadian dollar may "fully offset" any hope for economic recovery.
South Africa’s central bank has just announced that it has a policy of buying U.S. dollars in order to cheapen the rand. That country’s version of Bernanke, Tito Mboweni, said that although he used to be against intervention in the currency markets, the soaring South African rand has caused him to change his mind.
You can see why. Exports and domestic retail sales are plunging due to the high value of the rand. South Africa’s unemployment rate is now 23.5%, the highest of all 61 countries tracked by Bloomberg. Interest rates have been slashed this year from 7.5% to the current 4.5%, but this is not enough for the Union of Metalworkers, which has threatened to strike if interest rates are not cut more.
Finally, let’s look at Norway. Here is a European country, yet it does not use the euro, preferring instead to keep its own currency. This currency has risen by 13% so far this year against both the euro and the U.S. dollar. So are they happy about it in Oslo? Not very.
The strong currency has hit demand for Norway’s exports hard. In response to this, companies have cut staff, which in turn cuts domestic demand. Also, big companies laying people off is a very un-Norwegian thing to do. The world’s second-largest newsprint maker, Norske Skogindistrier ASA just announced job cutbacks. This has been something of a shock, even though the decline of newspapers should have been a warning. Newspapers just don’t want to pay higher prices for newsprint when the currency these products are denominated in has risen so much this year.
Norwegian Prime Minister Jens Stoltenberg, up for re-election this September, has said that supporting the labor market through this crisis - Norway’s first recession in more than 20 years (the last one coming when oil prices plunged back in the 1980s) - is his very top priority. He has pledged whatever money it takes to try to stimulate spending. And though, as far as I know, no one has publicly said that they want a lower krone, the central bank has cut interest rates fully seven times in the last eight months. It is now down to 1.25%, and stands ready to go lower.
One thing that’s important to remember: This is just a snapshot of those currencies that find themselves the strongest risers so far this year. At any given time in the last few years, whichever currencies have been strongest have screamed about their plight.
A year ago, for instance, with a euro at $1.60, Germany - a huge exporting country - basically said it wanted a cheaper euro. It got what it was seeking: The euro fell to $1.23 within months, but is now drifting back up. The United Kingdom wanted its high-flying pound - then at $2.10 - to fall to boost domestic and foreign demand for its goods. It got its wish: Within months the pound had plunged to $1.45. And on it has gone for a few years now.
A few years ago, Americans were angry that the Chinese had such a cheap currency and forced it to float. In the four years since that happened, China’s yuan has risen about 24% against the dollar and you don’t hear so many American threats. (Of course, this could also be because China owns so much U.S debt and America does not want to antagonize its largest lender).
As countries around the world with unwanted strong currencies move to cheapen them by printing more money, slashing interest rates, or just "talking" them down, investors are left with a key question: Just what are those strong currencies declining against?
If your answer is "against the currencies of their main trading partners," you are partly correct. But those declines are only temporary. If strong-currency countries are successful in their devaluation efforts, then their counterpart countries - their trading partners who don’t want their own currencies to go too high - will at some point launch a similar devaluation initiative.
It has become an endless round-robin game - except to call it a "game" is a little perverse. All holders of currencies suffer with the purchasing-power decline of their money. You go lower, but then your trading partners go even lower, and then you have to counter by cheapening your money yet again.
Thus what started as one country trying to keep a strong currency from hurting its economic interests morphs into an endless cycle that doesn’t do much to help the world economy in the long run.
But this powerful global trend does benefit one particular “currency.” In fact, it has benefited investors by generating returns in the multiple hundreds of a percent - minimum - to anyone on earth who has owned it since 2000. This currency is the world’s oldest form of money, one that’s been in use long before any of the other currencies were even dreamed about. And it will be used long after all of them are merely memories chronicled in history books. It is a form of money that cannot be printed at will and artificially cheapened. And even though all central banks own it, it is the creation of none of them.
In case you haven’t already guessed, I’m speaking about gold.
All That Glitters …
Sure, you can play the currency market. I’ve done it for over 35 years now - and quite successfully, too. You can buy a currency that is way too cheap and wait, getting paid nice interest while you wait. At least you could have done that until recently. With world interest rates now so low, no matter what currency you hold, you get paid nearly zero.
More importantly, if you sell one currency and buy another, you are not assured of the huge, 100% gains like you were until last year. I bought the euro in 2001, when it was worth 83 U.S. cents, and sold it last year just about the time it rose to $1.60. So with the interest earned during those seven years also factored in, it was a nice double. I bought the New Zealand dollar back in early 2002 when it was 40 U.S. cents and sporting a huge interest yield. I also made over 100% in a few years when the currency rose to nearly 80 cents and the great yields compounded.
Since last year, however, I’ve seen no currency where the prospect of its doubling is apparent. So all the talk about currency trading is something I would ignore. Traders don’t usually make money in the long run with fluctuations of 5% to 10%.
For most people, it’s much better to take a position in a currency that will benefit from this trend of competitive devaluations and stick with that.
That brings us back to gold.
Not too long ago, gold was money, and had been for recorded history. U.S. dollar bills stated on them that they were good for, say, 20 dollars worth of gold. But that tie has been cut for the last several decades.
I’ve been an investor since 1971, when I was 16. I’ve never had any other job. So I’ve become more attuned than most to new trends throughout the world economy. And even while I was selling my U.S. dollars and buying cheap euros back in 2000-2001, I started to notice this trend that I’ve labeled as “competitive devaluations.”
In my newsletter back in early 2002, what had been a strictly biotech letter was finally able to talk about any asset area. When I first publicly recommended gold - in the Feb. 15, 2002 issue - it was still trading at slightly less than $300 an ounce. The basis for my recommendation of both the metal and gold stocks was this trend I had seen of countries cheapening their own currencies against those of their trading partners in a competitive race to the bottom.
Shall we now see what gold has done in terms of the major currencies of the world since then?
The View From Abroad: South Africa
The rand has been the strongest currency so far this year. It is a big gold producer. Yet look at the price of an ounce of gold since 2000 in terms of the rand.
(click to enlarge)
On this chart - courtesy of kitco.com - start by looking at the left side of the chart. This index, and the green line, tracks the currency in question, in this case, the rand. The right-side index, represented by the black line, illustrates the price of gold in terms of the U.S. dollar.
You can see that, back in 2000, when this trend of competitive currency devaluations took hold, it took only about 1,500 ZAR to buy one ounce of gold. Late last year, you needed about ZAR 10,000.
The rand has strengthened since the start of the year, and has actually the strongest of all the major world currencies this year. You can see this by the last drop on the 10-year chart above. Today it takes less ZAR to buy that same gold ounce than it did late last year. Currently it takes only about 7,500 ZAR.
Even so, by carefully studying the last 10 years, it’s clear that the rand has certainly cheapened in terms of gold, or to turn it around, gold has soared by hundreds of percent in terms of the rand. To be exact, at this writing gold has risen nearly 380% against the rand, and this even though the rand has strengthened in the last few months.
But with all the screaming going on in South Africa about its recently "strong" currency, look for the value of the ZAR to drop, not just in terms of other paper currencies, but in terms of gold. That green line should be going north again, after the short, sharp rally of the last few months.
Gold Gains Nearly 200% for Australians
Now, let’s go to another currency that has risen sharply this year, the Australian dollar (AUD).
Given that Australia is another major gold producer, you’d expect that its currency would hold its value against gold, but my study of a 10-year chart of the Aussie tells another story.
Ten years ago, it took only AUD$375 to buy one ounce of gold. A few weeks ago, that same ounce would have required about AUD$1,550 for purchase. In the last few months, with the Aussie dollar stronger against nearly all other currencies - as well as against gold - it takes less of the Aussie to make such a purchase. Right now, for example, it "only" takes AUD$1,178 to buy an ounce of gold. But even so, with the recent "strong" Aussie, gold has risen 195% in terms of the Aussie dollar during the last decade.
Gold Posts Triple-Digit Gains Worldwide
You see the pattern. The Brazilian real (BRL) has also been a success story recently, and people have started to buy it. Yet in terms of gold its value has pretty much consistently plunged over the last decade. Gold has soared more than 300% in terms of the real.
Let’s turn next to North America, where we find that the Canadian dollar has held its value in terms of gold much better than its U.S. counterpart.
While gold has risen "only" 178% in terms of the Canadian dollar since 1999, it has risen fully 260.5% against the U.S. dollar. No wonder there have been calls for the end of the American dollar as the reserve currency of the world. The U.S. dollar just hasn’t demonstrated any long-term strength. Sadly, there is no paper currency ready to take its place. Any change in the U.S. dollar’s status is probably decades away.
China’s currency - the yuan, or “renminbi” (CNY) - is not yet even internationally traded. Until July 2005, it was tied to the U.S. dollar. But since then, the yuan has risen about 24% against the dollar, so it doesn’t take as much more of China’s currency to buy an ounce of gold as compared to the U.S. dollar. That’s another way of saying that the Chinese currency has held its value in gold better than the dollar.
If this continues, and the Chinese economy keeps growing, it may be only a matter of time before China’s currency becomes a major - and perhaps the major - world paper currency. China is already the world’s biggest gold producer, and the central bank buys 100% of the gold produced.
As great as the Chinese economy has been over the past decade, and as powerful as that Asian nation has become, gold has still soared about 200% in terms of the yuan. But that’s still not as much as the 260% it has risen in terms of the U.S. dollar.
Another big gold-producing country that has come up in the world is Russia. But its currency, the ruble (RUB), has collapsed in terms of gold.
A decade ago, it took only 6,000 rubles to purchase one gold ounce. A few weeks ago it took RUB 36,000. The ruble has rallied a bit, and today it "only" takes RUB 29,186 to buy that same ounce of gold. So gold has done better in terms of the ruble over the decade than it has against the U.S. dollar. Gold has soared 358.5% in rubles, versus the 260.5% gain it has posted in U.S. dollar terms.
To wind down this global tour, I want to talk about how gold has performed against a currency that has really lost value over the past decade. That currency is the Mexican peso (MXN). Until just recently, gold had soared by more than 500% in terms of the currency of Mexico, a country that paradoxically is both a major gold producer and the world’s biggest silver producer. The peso has also risen a bit in terms of many currencies in the last few weeks: Gold now has risen "only" 417% in peso terms over the past decade.
Finally, I want to show you gold in terms of a currency that has long been regarded as the strongest on earth - the Swiss franc. For decades, the Swissie has risen against the U.S. dollar. When I started investing, the Swiss franc was only about 22 U.S. cents. Now it is more than 90 U.S. cents.
But that strengthening means nothing to gold. Even the franc has plunged in value in terms of gold: Gold has risen almost 155% against the Swiss franc. A Swiss investor who just turned in all his cash and stocks into gold back 10 years ago would have done very well.
In fact, just to check, the Swiss stock market index shows that the last decade has been even worse against gold than just the currency. But this is also true against virtually all stock market indices in the world. Just being in cash has been better than being in the global stock indices since June 1999. Just take the Swiss market as an example (and many have been worse): On June 19, 1999, it closed at 7,190. Exactly 10 years later, it was 5,330.
Think about what this means. The Swiss stock market has fallen 25.9% in Swiss currency terms over the past decade. Put another way, just holding the Swiss franc would have meant a gain of 35% against putting it in the Swiss index. And yet over that same period, gold has risen 155% against the same Swiss franc. So when you, consider how much gold has risen in terms of most stock markets, the rise in the value of gold has been staggering.
I’m just using the Swiss stock market as an example. I could do the same with all the other major stock markets, and it wouldn’t be too much different. Switzerland is a rich country, but if gold has soared compared to that country’s stocks, you know something extraordinary has been going on.
Yet I’ll bet you that not one person in 10,000 sees this.
You have it within your hands now to be that one.
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