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Discussion Topics -- February 3, 2015

Race to the Bottom
Has the Currency War Officially Begun?

(February, 2015 discussion) Gold started the new year with a bang, rising more than 8% in January. The yellow metal was underpinned by a fresh wave of central bank easings (there were 15 in January alone), as the global currency wars intensify.

The big shocker for January occurred when the Swiss National Bank pulled the franc's ceiling against the euro, resulting in extreme foreign exchange market volatility. At one point during the day, the Swiss franc was up 40% against the single currency.

This move of course was driven by the expectation that the European Central Bank would begin quantitative easing. That expectation proved to be well-founded as Mario Draghi announced that more than €1 trillion euros would be printed over an 18-month period (at a minimum).

Providing additional turmoil in Europe was the latest iteration of the Greek debt crisis. Late-January elections brought the anti-austerity Syriza party to power; and they are doing their best to live up to their campaign promises. They are seeking a restructuring of their bailout with a rollback of the austerity measures that were a cornerstone of the original deal.

However, Greek finance minister Yanis Varoufakis freely acknowledges that his country is already bankrupt. If no deal can be struck, Greece will default and quite possible get ejection from — or choose to quit — the EU.

Amidst the fast running tide of monetary policy easings, the Fed stands alone in continuing to talk about rate hikes, even as much of the economic data continue to reflect growth and deflation risks. Nonetheless, the mere possibility of divergent monetary policy has caused the dollar to rise significantly. Dollar strength is hurting U.S. exporters, and therefore growth, while simultaneously exacerbating the price risks.

Unless something changes dramatically, the reality is that the Fed is going to find it difficult to justify a rate hike this year. When the Fed rejoins the battle to try and knock the greenback lower, gold is likely to benefit greatly. 29:49 Minutes, with Jonathan Kosares, Peter Grant and George Cooper.

Figure 1

Gold High Yield

Figure 2

WTICrude

Figure 3

Real Personal Consumption

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