ECB Chairman Mario Draghi's announcement of bigger
and better QE this morning should have surprised no one. The fact is
that the eurozone is coming apart at the seams and the only tool left to
delay the inevitable is easier money. As the following chart illustrates,
the euro has been declining since 2008, with the descent accelerating lately.
And more is coming. The only way for Italy, Greece and possibly France to
keep it together is for their currency to plunge relative to those of their
trading partners, thus making it easier to sell domestically-produced stuff
abroad. So euro parity with the dollar will generate headlines when it happens
but will just be a way-point on a journey to much lower numbers. That is, if
the whole global financial system doesn't blow up first.
What's a European saver to do? Sitting on a euro-denominated bank account
generated a 30% loss of real purchasing power during this "recovery," which
for the average European more than offset the trade benefits of a cheaper currency
(hence the recent political turmoil). So going forward, cash is clearly not
an attractive way to preserve capital.
Gold, on the other hand, is made for this kind of situation. In the past decade
it has more-or-less doubled in euro terms. The difference between a 30% loss
and a 100% gain is not lost on the people living through it, so expect European
gold demand to rise going forward.
Meanwhile, the same thing is happening in China, where the yuan has been falling
steadily and is now at a multi-year low to the USD.
The difference is that many Chinese seemed to have understood what was coming
and have for the past decade been loading up on gold. The result: currency
devaluation actually improves the finances of large numbers of gold-owning
citizens.
For Americans there are two lessons here:
1) Because we're making the same mistakes as Europe and China - borrowing
more than we can ever hope to pay off and papering the growing mess over with
artificially-low interest rates and aggressive currency creation - the dollar
won't last long as the only major currency that's appreciating. We'll eventually
be forced to devalue, which will take the currency war to a new and vastly
more dangerous stage.
2) When the above happens gold will soar in dollar terms just as it is now
rising in euro and yuan terms. So today's US savers have a choice of role models:
Will we be impoverished Europeans with shrinking bank accounts or enriched
Chinese with ever-more-valuable stacks of gold?
