Gold Price Get Pummeled & The Pound Gets Crushed - Gold Prices

What they are going through now, and what they may be about to go through, we will certainly encounter in the years ahead. The only difference is the fact that the leeway afforded to us by our special status simply provides us more rope to hang...
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Feb. 22, 2013 - PRLog -- As the international currency war intensifies, the majority of interest has been paid to the 17% fall of the Japanese yen against the U.S. dollar over the past few months. The implosion has given cover to the sad overall performance of another as soon as mighty currency: the British pound sterling. But in many ways the travails of the pound is far more instructive to those pondering the fate of the U.S. currency. How High Will Silver Go? Learn More Kitco Silver >>

Japan features a unique financial and demographic profile which tends to make it a poor stalking horse. Newly elected Prime Minister Shinzo Abe and the Bank of Japan have clearly and forcefully committed Japan to a policy of inflation at any cost. Even in a world of serial cash printers their plans stand out as exceptional. Britain, on the other hand, is charting a more standard course to the same destination.

The UK government, under conservative Prime Minister David Cameron and Chancellor of the Exchequer George Osborne, has succeeded in bringing marginal discipline to their budgetary imbalances. From 2009 to 2012, British government expenditures rose a total of just 1.6%, which was far beneath the official pace of inflation. (In contrast, U.S. federal spending grew by 7.9% over that time period). Since 2009 the British have kept their debt-to-GDP ratio lower than America's and have cut into that metric at a quicker price. But while the British are conservative when compared to their American cousins, they're hardly austere when compared to Germany (which continues to have a nearly balanced budget and very low debt to GDP). Paul Krugman blames Britain's lackluster financial overall performance on their misguided experiment with austerity. Gold Coins, Silver Coins, Rare Coins  Learn More >>

Given the relatively moderate approach pursued by the British, the poor overall performance of their currency may be hard to fathom. The deciding aspect may be that the Pound Sterling is not almost as important to investors, or as integrated in to the global economy, because the U.S. dollar or the euro. The greenback, being the world's reserve currency, has usually benefited from demand that is independent of its economic fundamentals. The euro benefits from the size of the euro zone and also the legacy of German banking discipline. The pound enjoys no such privileges and as a result foreign central banks do not feel as pressured to prop it up. Consequently, over the previous few years the pound has been... pounded. Since July 2008, the currency is down 26.7% against the U.S. dollar, and in current months it has started falling faster than all other created currencies except for the Abe-pummeled yen. Since October 1, 2012 the pound has fallen by 4% against the dollar and 8% against the euro.

The pound's well being is produced more suspect by the extreme challenges faced by the Bank of England because it tries to stimulate the most admittedly inflation prone economy among the major Western nations. In contrast to the Federal Reserve, that is tasked by statute to combat both inflation and unemployment, the BofE has only a single mandate: to keep inflation contained. On that score it has been failing habitually. Inflation in the UK has been north of its 2% target for the past five years (the current official rate is 2.7%). In its most recent inflation projections, Mr. King admitted that it'll stay that way for years to come, and that it may exceed 3% this year and next. With its currency weakening and inflation accelerating, the mandate of the BofE would clearly indicate that the time has come for monetary tightening.

While the American media has poked fun at the Bank of England's backtracking, they somehow don't understand that the Federal Reserve could be doing exactly the same if not for the advantages given to us by the dollar's reserve status. Our capability to monetize the vast majority of the annual government deficit while exporting our inflation through half trillion dollar trade deficits and the overseas sale of a huge selection of billions of Treasury bonds annually means that we do not however face the pressures bearing down on the Bank of England.

But already the Fed has done plenty of backing off from its prior promises. Just a few months ago Ben Bernanke announced particular inflation and unemployment triggers that would apparently put monetary policy on automatic pilot. But just last week, Fed Vice Chairman Janet Yellen announced that these goalposts (6.5% unemployment and 2.5% inflation) should not be regarded as "triggers" but as thresholds past which the Fed "may consider" tightening. When U.S. prices start to rise in earnest, look for the denials and rationalizations to come in torrents. The Fed will never acknowledge high inflation regardless of what the data, nor will it ever take any actions to combat it. The easy reason is that it will be unable to do so without bringing on the financial contraction that's so terrifying to the British.

Nevertheless, as British inflation accelerates, the pressure around the Bank of England to change course will intensify. As monetary stimulus continues to take its toll around the pound, price pressures will mount, even because the economy continues to stagnate. In other words, it's charting a course to stagflation. Perversely, this will place even more stress around the BofE to ease. Nevertheless, more inexpensive cash won't stimulate the economy but merely cripple it further by fueling the inflationary fire.

At some point the British will have to admit that stimulus does not work. To break the inflationary spiral and rescue the ailing pound, the BofE will be forced to aggressively raise rates, at which point the British government will have no choice but to slash spending more deeply than would have been the case had they taken their medicine sooner. Nevertheless, if the BofE refuses to tighten even in the face of much greater official inflation, the pound might deteriorate further and the UK might be left with the embarrassing choice of adopting the euro.

As far because the United States of America is concerned, the U.K. is the canary in the coal mine. What they are going through now, and what they may be about to go through, we will certainly encounter in the years ahead. The only difference is the fact that the leeway afforded to us by our special status simply provides us more rope to hang ourselves. When the noose lastly tightens, the fall will probably be that a lot more painful. Experts in the commodities futures markets recommend to buy gold and buy silver today. How High Will Silver Go? Learn More Kitco Silver >>
Source:Franklin P. Whitman
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