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Fiat currency markets are in a state of turmoil. Japan, Russia and most emerging markets of any significance have all witnessed sharp currency devaluations against the dollar in the past 2 years. In Japan's case, the Yen has slumped to its weakest level against the US dollar in a generation – and perhaps more insidiously, the Yen has been sacrificed by its own central bank as a central pillar of economic policy to stimulate growth within Japan's economy. For ordinary every day citizens, the long run implications of these policies are nothing short of a catastrophe.
A slumping currency ultimately leads to one unsavory conclusion – slumping purchasing power, and a slumping standard of living.
ECB Joins the Party:
Massive policy intervention from the Japanese monetary authorities (The BOJ has been conducting its own QE program for the best part of 30 years) and outright carnage in the currency markets of emerging markets is pretty standard fare for most financial analysts and market commentators. Witnessing meltdown in developed market FX is a far less frequent occurrence. We are getting a glimpse into the very real threat of what a currency devaluation in a developed market looks like with the ongoing chaos in the Euro currency.
The ECB's Quantitative Easing program is the latest salvo in the worldwide currency war raging across financial markets. The Euro just recently touched a 12 year low of 1.04 vs the USD. Parity against the greenback is within touching distance – and for savers with Euro denominated accounts, this equates to a 33% drop in the value of their deposits since March 2014. This is an intended outcome for the ECB's money printing program and is set to continue for the foreseeable future. What this means for the average citizen in the Eurozone is a collapse in the level of their share of global purchasing power – the cost of imported goods and energy denominated in dollars will increase leaving less disposable income for consumption on other goods by Eurozone citizens.
Charts from Bloomberg
The Biggest Loser:
Savers are set to lose the most with respect to the ECB's QE program, interest rates will remain depressed and the global purchasing power of their deposits will fall due to the weakening Euro. The ECB is just the latest central bank to attack savers in this way. The FED BOJ and BOE have all established solid blueprints since the Lehman crisis on how best to accommodate corporate interests ahead of the those of the ordinary citizen. What all of these central bank actions prove is that savers and investors are at threat from increasingly menacing forms of economic policy from their respective government and monetary authorities. Finding ways to mitigate these effects has never been greater.
Golden Parachutes: Insurance from deposit value free fall
What has happened to European, Russian, Japanese, and savers from countless other countries over the past several years brings gold's value as an enduring store of value into sharp focus. Since the start of 2015, gold has exhibited its classic role as portfolio insurance for European savers. Savers who elected to hold gold as part of their wider portfolio were able to mitigate the effects of the Euro's de facto devaluation by the ECB. Gold prices denominated in Euro terms are up 9% since March 2014, although far short of the gains enjoyed on a relative basis against the dollar, gold none the less has proved itself during this period to be an important component of portfolio construction.
A more important lesson from the past 12 months could also be just how rapidly the monetary policies of governments around the world can devastate the value of their respective currencies. The US Dollar is king of the hill right now – but its increasingly doubtful that it always will be. Recent experiences from the Eurozone highlight just how fragile fiat currency systems are – they can be devalued at any moment by forces out with our control.
Gold has always acted as a counter measure to fiat currency devaluations and has helped investors across the world over the past several years to ensure the purchasing power of their savings remains intact in face of the anti-saver central bank policies. There has never been a more pertinent time to start thinking about adding gold to your existing portfolio.