The week of June 3 2013, in Review -Ongoing Currency War-

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Dear PGM Capital Blog readers,

In this weekend blog edition, we want to discuss with you some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of June 3rd 2013.

The following world currencies received a haircut this week:

  • The Australian Dollar, fell to a 1-year low of USD = 0.9444 = AUD 1.00
  • The Canadian Dollar, fell to a 1-year low of USD 0.9610 = CAD 1.00
  • The Brazilian Real was the most hit and fell to a 4-year low on Friday, June 7th 2013, of USD 0.46057 = BRL 1.00 as can be seen from below chart.
    1 year BRL versus USD

The Brazilian BOVESPA Index fell to a 4-year low on Friday June 7, 2013:

Based on the economic policy of the current Brazilian government the fall of the Real also dragged down the Brazilian BOVEPA to a 4-year low, on Friday June 7th, as can be seen from below chart.

Screen Shot 2013-06-08 at 1.10.39 PM

The fall of the Brazilian currency, the “REAL” and the BOVEPSA index to respectivley 1-year and 4-year low is a clear sign that investors have lost their confidence in the current Brazilean Economic policy.

Figures published on May 29th 2013, showed that in the first quarter of this year the Brazilian economy grew by just 0.6% (2.4% annualized), well short of the recovery analysts had expected. For the first time in years the country is running a trade deficit. Its primary fiscal surplus (i.e., before interest payments) is shrinking and government debt is growing and inflation is close to 6.5 percent.

The deterioration in the economic data and public sentiment seem to have forced the government’s hand. Despite the weak growth figures, the Central Bank surprised markets by raising the base interest rate from 7.5% to 8%, making Brazil the only big economy currently tightening monetary policy.

After becoming president on January 1st 2011, Dilma Rousseff sought to stimulate growth by hiking public spending and the minimum wage, and forcing state-run banks to lend more. The resulting inflation was tackled not by raising interest rates but by cutting sales taxes and holding down the price of items with a big impact on the inflation index, including food, petrol and bus fares. Until recently voters reacted favorably, though the economy did not. Polls in March gave Ms Rousseff a record-breaking 79% approval rating, making her the clear favorite to win next year’s presidential election and allowing her to put off economic adjustments until a second term.

The Free Fall of the Japan Nikkei Index:

The Japanese Nikkei Index had a bad week and fell further from its five-year high of 15,627.26 points, reached on May 22, 2013, to 12,877.53 points on Friday, June 7 this year, as the graph below shows.

Nikkei-225 Index 5-year chart

The above clearly shows that Japan’s prime-minister’s Economic plan  (Abecnomics) of revitalizing Japan’s ailing economicy via money printing has failed. On the other hand Abe Economics has achieved to turn Japan’s 20 years of deflation into inflation. By diluting the value of the Yen in the last 6 months with approx. 30 percent against all mayor currencies, prices of imported goods and services in Japan are rising.

According to an article in “The Economics” of May 18, 2013, even prices in Japan’s red-light district are now rising.

Source:

If Brazil and Japan are examples for the ongoing currency war, we have to fasten our seat bells and be prepared for run-away inflation that will destroy savings and pensions. History has proven that Gold and Silver are the only safe haven during periods of hyperinflation and subsequent dilution of purchasing power of a fiat currencies.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely,

Eric Panneflek

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