Masters Series: The Global Currency System Is Collapsing
Editor's note: Our warnings are starting to come true.
The massive central bank manipulation and global monetary experiment is coming to a head.
In today's Masters Series – adapted from the July 18 issue of Stansberry Gold & Silver Investor – Porter and his research team explain what's happening... and what it means for precious metals prices...
The Global Currency System Is Collapsing
It's here...
We've been warning about an inevitable global monetary crisis for years. And now, it's underway. The currency destruction will upend markets.
Efforts by Japan's central bank, the Bank of Japan, to stimulate its economy are failing. The world's third-largest economy has seen practically zero real year-over-year growth in its gross domestic product. Over the past several months, the island nation has witnessed deflation setting in.
Negative interest rates and aggressive bond-buying are not instilling confidence in investors. Former Federal Reserve Chairman Ben Bernanke met with Japanese officials last week. Reports suggest more stimulus is on the agenda in an attempt to fight deflation.
Prime Minister Shinzo Abe won the Japan elections in a landslide victory, winning 77 out of the 78 seats needed for a two-thirds majority. With the Japanese economy struggling and Abe desperate to spark inflation, he told reporters, "We will have to accelerate Abenomics to meet the public's expectations."
Speculation is mounting that Japanese policymakers will pursue the idea of "helicopter money," which would include the central bank directly financing stimulus programs. This would start the next major bout in the currency wars.
The Financial Times recently reported that the government could issue a nonmarketable perpetual bond with no maturity to fight deflation. Others think Japan may make the perpetual bond zero coupon, too. What a deal... A bond that never pays off at maturity, can't be resold on a normal, major secondary market, and pays no interest.
As it stands, its 40-year bond currently yields a miserable 0.352%. Absurd as this all seems... anything is possible.
The yen is up roughly 14% this year as Japanese investors flee foreign markets. But investors are also using this opportunity to buy gold. Japan's largest bullion retailer, Tanaka Holdings, reported a 60% jump in sales during the month of June... further evidence that the world is losing faith in central bank policies.
This is truly remarkable. Japanese officials are doing everything they can to create inflation and the economy simply won't respond. But the prime minister is determined to crank up "Abenomics" policies and helicopter money is on the way. This is just getting started...
China continues to devalue its currency, with the People's Bank of China fixing the yuan at its lowest level since 2010. Chinese policymakers are looking for a weaker yuan to help exports and simultaneously avoid depreciation, which could spark capital outflows. According to a Bloomberg report, policymakers are urging local governments and state-owned enterprises to issue U.S. dollar-denominated bonds abroad due to the strength in the dollar. Funds raised from bond issues would return to China and help stem capital outflows. The yuan broke down to around 6.70 last week – a price not seen since September 2010.
The "Metropolitan Man" warned that we would see these things happen in Japan and China before the run on the U.S. dollar began.
As we noted in the June 23 Digest, he outlined three tangible signs we're likely to see before the run on the U.S. dollar begins.
| 1. | Japan's central bank begins directly buying U.S. and European financial assets in an effort to further weaken the yen... |
| 2. | China follows the Japanese by devaluing the yuan substantially... |
| 3. | More and more mainstream newspapers and political leaders will call for pegging currencies to gold in order to stop the world's increasingly chaotic currency fluctuations. |
On the other side of the globe, Britain is causing its own upheaval after voters approved a referendum to leave the European Union. The surprising passage of last month's so-called "Brexit" vote caused the British pound to plummet as much as 12% – its largest one-day drop ever. Credit agency Moody's even downgraded the outlook on Britain's credit rating from stable to negative.
And it weighed on markets around the world... Wall Street suffered its worst day in 10 months as the S&P 500 dropped 3.6% after the referendum. British stocks, as measured by the FTSE 100 Index, dropped by about the same. European stocks fared even worse, plummeting almost double that at around 7%. (Since then, the S&P 500 has recovered and is up roughly 3%. The FTSE 100 is up 7%. European stocks remain down about 1% over the same period.)
As we explained in the Stansberry Digest, the European Union – the world's largest economy – has failed. We expect this was the first major domino to fall in the collapse of the global monetary system.
The problems in the markets aren't limited to the U.K. and its banks. Twenty of the world's largest banks have lost nearly $500 billion – one-fourth of their value – over the first half of this year.
As we have said many times, we disagree with the manipulative policies of central banks. However, these efforts to devalue currencies worldwide bode well for gold.
In the post-Brexit chaos, gold's price jumped 5%. It has since stayed above $1,300 per ounce even as stock markets around the world have recovered to around pre-Brexit levels.
Holdings of gold-backed exchange-traded funds (ETFs) jumped $4.3 billion the day after the vote. Investors flock to gold when uncertainty roils the markets.
And gold has rallied more in the first half of this year than in any January to June stretch since 1974.
The largest gold-backed ETF in the world, SPDR Gold Shares Trust (GLD), is enjoying the best year since its inception in 2004. Total assets under its management have soared by more than $18 billion this year. GLD now holds more than $40 billion in assets, representing almost half of the money invested in funds backed by physical gold.
The NYSE Arca Gold BUGS Index ("HUI"), an equal dollar weighted index of gold mining companies, has skyrocketed more than 140% this year, compared with around a 6% rise in the S&P 500.
In tomorrow's essay, we'll discuss the indicator that suggests precious metals will continue to march higher... and which asset should outperform the others over the next six to 12 months...
Regards,
Porter Stansberry
Editor's note: If you've ignored all of our advice this year and completely missed the huge rally in gold and gold stocks... you're in luck. Porter believes that a different asset could more than double gold's returns over the next six to 12 months. Learn why here.