The day the Euro cracked

Today was the day the Yen carry trade started to unravel.  Once upon a time, you could go to the Bank of Japan (otherwise known as the U.S. Fed East) and borrow a bazillion yen at a very low interest rate, say none per cent.  Then you invest the money in Australian bonds that pay 6% interest, making an easy 5+% interest.  A bazillion times 5% is a significant amount of money.  But this scheme only works when the yen is stable or declining against other currencies.  If the yen starts to appreciate, the trade blows up.

 

Today the trade blew up.  BTW, it isn’t just the Australian dollar that suffered.  Institutions and hedge funds were using borrowed yen to speculate in stock markets all around the world.  Today virtually every currency outside Asia was down sharply against the US Dollar, which itself was off 4% against the Japanese yen.  With the yen approaching parity (1 US Dollar = 100 yen) all of those yen were on their way back to the land of the rising sun.  In doing so, they sucked all air out of the global stock markets.

 

Gold resumed its normal role as a hedge against catastrophe, and was up nearly $40 at one point today, as we had the unusual spectacle of gold and the US Dollar showing great strength at the same time.  The Euro suffered as gold is now approaching an all time high in Euro terms.

 

To make this even more ludicrous, the futures price of gold on the Comex was $840 while the price of physical gold in Asia was $960.  Bullion banks and investment banks have sold unlimited amounts of futures contracts on the commodity exchanges to depress the price of gold and silver, while the metals themselves have disappeared from the marketplace.  Coin dealers around the world have run out of inventory, and when transactions do take place (on eBay or anywhere else) they are at stiff premiums to the phony Comex price.

 

The only question now is when the US Dollar heads down again.  There will be another rate cut this month, either an emergency cut any day now, or at the month-end meeting.  A 50 or 75 basis point cut will be coordinated with the ECB, since their currency has to depreciate, too.  The only question is whether they can continue to manipulate the price of gold and silver until after next month’s election.

 

The latest rumor I have heard is that a consortium of Russia, European, Asian, and Arab countries have plans for a gold-backed currency.  It’s hard to imagine all of those countries agreeing on anything, but it is more likely the Russians could introduce a gold-backed ruble, or the Arabs a gold-backed dinar.  To compete with a real currency of that nature, the US would have to raise interest rates substantially, something our government desperately does not want to do.  In any case, gold and other commodities will appreciate strongly in Dollar terms.