Frank Holmes | Feb 03, 2015 04:05AM ET
The Chinese Year of the Ram will kick off at the end of this month, but for now it looks as if 2015 will be the Year of the Central Banks.
I spend a lot of time talking about gold, oil and emerging markets, and it’s important to recognize what drives these asset classes’ performance. Government and fiscal policy often have much to do with it. But in the past three months, we’ve seen central banks take center stage to engage in a new currency war: a race to the bottom of the exchange rate in an attempt to weaken their own currencies and undercut competitor nations.
Indeed, amid rock-bottom oil prices, deflation fears and slowing growth, policymakers from every corner of the globe are enacting some sort of monetary easing program. Last month alone, 14 countries cut rates and loosened borrowing standards, the most recent one being Russia.
A weak currency makes export prices more competitive and can help give inflation a boost, among other benefits. “The U.S. seems to be the only country right now that doesn’t mind having a strong currency,” says John Derrick, Director of Research here at U.S. Global Investors.
Since July, major currencies have fallen more than 15 percent against the greenback.
This and other monetary shifts have huge effects on commodities, specifically gold. As I told Resource Investing News last week:
Gold is money. And whenever there’s negative real interest rates, gold in those currencies start to rise. Whenever interest rates are positive, and the government will pay you more than inflation, then gold falls in that country’s currency. Last year, only the U.S. dollar had positive real rates of return. All the other countries had negative real rates of return, so gold performed exceptionally well.
Other countries whose central banks have enacted monetary easing are Canada, India, Turkey, Denmark and Singapore, not to mention the European Central Bank (ECB), which recently unveiled a much-needed trillion-dollar stimulus package.
Speaking of oil, the current average price of a gallon of gas, according to AAA’s Daily Fuel Gauge Report, is $2.05. But in the UK, where I visited last week, it’s over $6. That’s actually down from $9 in June. You can see why Brits don’t drive trucks and SUVs.
But that’s the power of currencies. China’s economy surpassed our own late last year, based on purchasing-power parity (PPP).
Brett Arends puts into perspective just how huge this development really is:
“For the first time since Ulysses S. Grant was president, America is not the leading economic power on the planet.”
An easier way to comprehend PPP is by using
Every asset class has its own unique characteristics. Do your due diligence.
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