Precious metals in a world that is flat, fungible and fiat

Ultimately, the global markets remain the battlefield in which investors compete for the last remaining quality collateral. Furthermore, secondary to Fed taper talk’s effect on the United States, is its impact on markets abroad.   

As a case in point, the impact of the recently announced Fed QE taper plans on the exchange rate of emerging market currencies has been rather dramatic to say the least. The threat of tapering has sent shock waves across emerging markets seeing sharp crashes in the value of Indonesian and Indian currencies. Even the Mexican peso has been hit substantially as hot money investors’ interest returns to dollar assets.  

For now the focus is on U.S. Treasuries and currencies, but this is only foreshadowing the upcoming rush into physical commodities — whose market value remains hostage to false speculation and manipulation — the poster children of which are the precious metals.

Asian bond prices are also falling, and the last time they traded below par was after the Lehman bankruptcy. This all coincides with U.S. deficit funding, need reduction and repo collateral scarcity.

The Emerging Markets Currency Debacle and Silver

The failure of emerging market currencies like the Indian rupee and the Indonesian rupiah to gain support against the U.S. dollar have been especially notable and this is having a marked effect on growth in those economies.  

For its part, India is currently considering drastic measures aimed at supporting its currency the Rupee that has been under attack. The rupee fell 25% over the last few months as the flight to quality gathers steam after the Fed’s taper talk initially began.

Furthermore, even the Mexican peso and the Brazilian real have seen strong selling pressure emerge in the past few months, with the peso’s exchange rate against the U.S. Dollar falling from 11.94 in May to a low of 13.47 seen in recent trading sessions.

This negative taper talk effect on emerging markets currencies seems to be another black swan event since it surprised the financial markets, had a substantial impact and has been rationalized in hindsight. Large funds and hot money investors have been scrambling to respond to the Fed’s taper talk as best they can.

Official Indian Attempts Backfire

The various official attempts by the Indian government to offset troubling Fed taper talk effects on its currency seem to be backfiring, adding fuel to the declines in other emerging market currencies like the Indonesian rupiah as well.

Indian Plan A seemed to follow the status quo by blaming currency outflows on the Fed and speculators. When that failed to halt outflows from the rupee, the response to something clearly going on was to initiate 'capital controls' on foreign exchange and tariffs on gold as Plan B. 

Plan C attempted to confiscate people’s gold since the previous plans had not worked. The Indian government is now trying out their Plan D by ditching the U.S. dollar for trade related payments, especially for oil that is up 50% in rupee terms in just four months.

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