The World of Currencies


QUESTION: Mr. Armstrong, the pegs are breaking everywhere. It appears that what you have warned about is unfolding right on time. The emerging markets seem to have a choice. If they do not float they will end up with the same crisis as in 1997. China seems to react quickly to their numbers showing their economy is slowing down by more than 8%. Will they too eventually float?

ANSWER: Kazakhstan’s national currency, the tenge, dropped 23% on Thursday following the government’s decision to allow a freely floating exchange rate. We are seeing the Russian rouble and Mexican peso take a hit as well. Fixing currencies means the government must take on all sellers. That is a guaranteed trade. They always fail.

China will eventually have to allow the reminbi to float. There is no choice in that matter if they (1) want to avoid accusations of engaging in a currency war, and (2) they want to make the renminbi a world currency. That is the end game.

This is pushing the dollar higher. So why is gold rising? They are attributing this to the dovish Federal Reserve minutes and sliding global stock markets that increased the metal’s safe-haven appeal. But that is all nonsense. This is what I mean about fundamentals. They select what they need to fit the move. Why is gold rising with a rising dollar? Eventually, when the cycle shifts, gold will rise with stocks and with the dollar. It is not much of a short-term safe-haven when it pays no interest. The only thing that will create inflation is rising interest rates for that will decouple the world economy. The Fed is totally trapped and we have a massive pension fund crisis on the horizon. Gold is doing what our model projected and it is a short-cover rally for the near-term. When we elected the monthly bearish reversal of 1155 by some $60+ away, you typically rally back to retest that number before proceeding. I have stated countless times that is just the way markets move. At the movie showing on August 1, I answered questions about how it was good news to see articles calling gold the “pet rock” from the WSJ and the computer issuing a buy signal. That was perfect timing.