Currency Rumble Royale

When a country's currency is devalued relative to other countries' currencies, the expected result is that individual country's exports are relatively cheaper compared to the other countries'. Hence, the motivation behind central banks devaluing their currency is to stimulate exports and by extension, the domestic economy. However, this devaluation is a zero-sum game, because as one country's exports increase, another country's exports decrease, relatively-speaking. And when all countries attempt to boost their exports by devaluing their currencies, it becomes a competitive currency race to the bottom, destroying the wealth of their citizens.

Why is that? How can the stimulation of a country's exports be destructive to the wealth of its citizens? Because even though exports to other countries are cheaper, and since the value of the local currency is cheapened, imports and domestic items are more expensive. A debased currency causes price inflation in the local economy; it takes more local paper currency to purchase items like food, water, energy, and shelter. Everybody suffers diminished purchasing power. Inflation is a hidden tax, reducing the standard of living for everyone, especially the lower and middle classes.

But sovereign nations are doing exactly that--manipulating their currencies lower to keep their factories humming and capping unemployment. China doesn't want the yuan to appreciate by 40% relative to other currencies (specifically the USDollar) because 200 million jobs are at risk. So they peg their yuan to a USDollar that is being systematically destroyed by the Fed, which accommodates an overspending Congress. In other words, it is the Fed that is manipulating the USDollar, as China piggybacks the yuan on the USDollar.

But US politicians need a scapegoat, and the Chinese are a convenient target. In fact, Japan intervened and devalued the yen last week, raising the ire of officials in the Euro zone and the US. And they also triggered trade war rhetoric with China. All told, more than 25 countries devalued their currencies recently, as they each attempt to fix their impaired domestic economies. It is analogous to mass mutual currency suicide, as the wages and purchasing power of their citizens are structurally destroyed.

That's why the last man standing in this currency war will be precious metals. Precious metals are scarce and carry a finite supply--they cannot be created by a printing press. They must be discovered and mined, which takes 10 - 15 years. The easy discoveries are long gone, and ore quality (ounces per ton) has deteriorated. Miners must wander off to geopolitically unstable regions to find it, dig deeper, satisfy tougher environmental constraints, invest more in the local communities, and expend higher costs for energy, water, and labor to produce smaller quantities of the metals. Hence, supply is shrinking, even while investment demand is soaring.

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Disclosure: long precious metals and long mining equities.