currency wars

How to Make a Fortune If the Currency Wars Go Atomic

There’s a lot of talk about currency wars these days, but very little understanding about what they mean for economic growth, inflation, and your pocketbook.
Today I’m going to fix that. I'm going to explain, in simple terms, how currency wars affect you. Better yet, I’m going to show you how to turn the implosion that could result from currency wars into a personal fortune.
Here’s why you’ll need to be ready to buy, buy, buy...

Best Investments 2013: What to Buy as Global “Currency Wars” Begin

Currency faces

Japanese Prime Minister Abe's recent success in talking the yen lower against other currencies has increased fears over "currency wars." Now investors are on the hunt for the best investments to profit from central bankers' "race to the bottom" in 2013.

As we've pointed out, the Japanese have done nothing overt to weaken the yen - yet. Markets were massively long the Japanese currency and, when Prime Minister Abe called for "unlimited easing" during the election campaign last year and in the run-up to selecting a new Bank of Japan governor, that was all traders needed to hear to begin selling their yen long bets and taking out short positions.

Abe's great success was in getting the market to do all of the heavy lifting for him.

In fact, Abe has been a little too successful. Minister of Finance Taro Aso told reporters in Tokyo on Friday that the yen had weakened too quickly, which prompted an immediate reversal in the currency markets.

Aso's comments came after remarks by European Central Bank President Mario Draghi Thursday raising concerns that the recent strength of the euro might derail the recovery just gathering momentum in Europe now.

Looking at the interplay of comments from Draghi and Aso last week, it is tempting to think that all of this commotion in the currency markets is being coordinated at the highest level of central banking.

But, with the exception of China, which has been quietly pushing the renminbi toward the lower end of its trading range, no one has done anything. It's all just talk.

In the financial markets, however, talk is a big industry. Talk gets people to put on trades and that is how bankers and brokers make money.

This leaves investors wondering the best currencies to invest in to profit from these fluctuating values, which is why Morgan Stanley developed a currency war basket trade.

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Here's the Surprising Winner of the Currency Wars

With the Bank of Japan now buying government bonds and targeting an inflation rate of 2%, a global "race to the bottom" is on again.
Japan's latest move has sparked new fears of a currency war. They're competing with the Fed's commitment to "quantitative easing" and the ECB's promise to buy dodgy Mediterranean economies' bonds.
However, the mathematical reality is that the world's major currencies can't all be catastrophically weak against each other. It's impossible.
Like any other war, this one won't end well, either.
But the winner may surprise you...

Why the Japanese Yen Has Triggered Global Concern

Country Japan sushi small

The Japanese government was criticized for deliberately weakening the Japanese yen by German Chancellor Angela Merkel during a question-and-answer session following a speech at the World Economic Forum in Davos, Switzerland.

"I can't say I'm completely free of worry when I look at Japan right now," Merkel said, according to Bloomberg News.

Michael Meister, a senior member of Merkel's Christian Democratic Union who will be meeting with Japanese officials next month, said in a telephone interview with Bloomberg, "What can Japan's competitors do? Either we're all smart and do nothing, or we follow suit and create a spiral that hurts us all."

"The Japanese economy's real problems are structural and beg structural remedies, not tampering with the exchange rate," Meister continued.

Merkel and Meister are not the only German critics of Japanese Prime Minister Shinzo Abe's program to revive the Japanese economy through weakening the yen.

Germany's Finance Minister Wolfgang Schaeuble raised concerns about excess Japanese liquidity flooding the global capital markets while Bundesbank President Jens Weidmann warned of politicizing the Japanese yen.

Meanwhile, South Korean Finance Minister Bahk Jae Wan said South Korean exporters, which compete directly with Japanese companies in many industries, including cars, electronics and engineering, might be "at risk."

Deng Yuhan, writing for China's Xinhua News, said, "The easing of Japan's monetary policy entails the weakening of its currency, a side effect - if not the purposeful design - that can translate into an artificial and unfair price advantage for Japanese exports."

Deng continued, "It is a safe bet that others would respond with driving their own currencies down, thus igniting a downward race among the world's most heavily traded media of exchange - known in a more dreadful way as currency wars."

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Gold Prices: Have We Reached "Peak Gold"?

Hands with coins

Expectations for gold prices just grew brighter due to a recent outlook on production numbers.

Gold producer Iamgold Corp. (NYSE: IMG), which has mines in Canada and Mali, forecasts gold prices will soar to a record $2,500 an ounce as global output peaks and ore grades decline.

Grade is the relationship between quality, tons, geometry and depth that indicates if a gold find can be extracted at a cost that makes doing so profitable. High grade is key in a gold deposit.

Iamgold CEO Steve Letwin told Bloomberg News in a Jan. 10 interview that the industry has exploited its best-quality gold reserves and as a result is tapping lower-grade and higher-cost deposits.

In fact, he sees this as a sign of "peak gold" - when the maximum rate of global gold extraction is reached.

"I really think we are at Peak Gold. Nobody has seen the kind of production profiles they thought they were going to see," Letwin explained.

What is Peak Gold?

After peak gold is reached, there's a terminal decline in the rate of production.

The "peak gold" theory mirrors the "peak oil" theory, which maintains the earth holds a finite amount of crude, and production will eventually outstrip supply.

The peak gold phenomenon was actually spotted several years back.

Barrick Gold (NYSE: ABX) CEO Aaron Regent told The Daily Telegraph in 2009 at the Royal Bank of Canada's annual gold conference "there is a strong case to be made that we are already at peak gold."

"Production peaked around 2000 and it has been a decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore," Regent said.

In 2001, the world saw what was believed to be record global gold production of 2,649 tons.

And what has happened since then in gold production supports the peak gold theory...

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Gold Prices in 2013 to Go Higher Thanks to These "Wars"

Gold nuggets Gold prices in 2013 are already expected to top $2,200, and adding fuel to that price surge is an accelerating trend in the global economy.

We're talking about currency wars.

The term currency wars describes a race between many of the world's central banks to make their currencies worth less relative to other currencies, with the goal of increasing exports by making them cheaper.

Such a strategy becomes less effective as more countries join in the battle, but a growing currency war has another effect that investors can exploit: As central banks devalue their currencies, they create inflation and cause hard assets like gold to rise against them.

Fortunately for gold investors, most of the world's central banks, from the U.S. Federal Reserve to the Bank of Japan, are expected to further step up their currency devaluation in 2013.

"Implementation of the European Central Bank's Outright Monetary Transactions, andfurther Bank of Japan easing -- both of which we expect - [will] support gold, aswould a weaker outlook for the yen, which competes with gold as a flight-to-qualityasset," wrote UBS analyst Edel Tully in a recent research note.

Why Currency Wars Will Get Worse in 2013

While the central banks' easy money policies have been aimed at stimulating their own sluggish economies, the effect has been to strengthen other world currencies, particularly those in emerging markets.

That has made their exports more expensive, hurting their economies. And they've had enough.

"Advanced countries cannot count on exporting their way out of the crisis at the expense of emerging market economies," Brazilian Finance Minister Guido Mantega said at an International Monetary Fund Meeting last week. "Brazil, for one, will take whatever measures it deems necessary to avoid the detrimental effects of these spillovers."

Mantega singled out the Fed in particular, calling its bond-buying QE3 (quantitative easing) program "selfish."

Emerging economies are also uneasy about the recent election of Shinzo Abe as Prime Minister of Japan. Abe and his Liberal Democratic Party are expected to push for as much as $120 billion of stimulus spending plus call on the Bank of Japan to print piles of yen.

"It's almost obscene what they're talking about doing," John Mauldin, chairman of Mauldin Economics, told The Daily Ticker.

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