A Global Currency Reset Is Upon Us
With a hurricane bearing down on our video editing team, Amber and I skipped our usual video this week. (Check out the first two on our YouTube channel here.)
Instead, we’ve put together a few charts we think are important.
So important, in fact, that they’re likely the precursor of a global monetary reset on the scale of the 2008 financial crisis… And prior crises that started the exact same way.
This week saw significant events in financial markets that will define the years to come. Understanding them will separate the winners from the losers.
Let’s dive right in.
The Pound, and Gold’s Currency Divergence
The British pound is catering against the U.S. dollar. It’s down about 23% from the 2021 highs.
Every trader is watching the pound this week. It’s the biggest financial story in the world. But we’re looking at it in a different way.
Below is a chart of the price of gold in dollars, and the pound.
With gold in pounds showing strength as gold in dollars collapsed, it shows traders expected a problem in the United Kingdom as early as April.
Gold is up more than 18% in pounds over the last year. It’s down 6% in dollars.
Typically, we expect the trend of gold to be the same in any currency. The two lines in the chart tracked each other closely until April. Then, gold in dollars fell while gold in pounds held steady. That signaled traders wanted to protect their accounts from a decline in the pound and turned to gold to hedge against the risks they saw.
Gold priced in most other currencies is tracking the dollar. However, two currencies are diverging from the trend. Both provide important information.
The first is the Turkish lira. Gold priced in lira is near all-time highs. This comes as Turkey sees mysterious inflows of money. The central bank recently revealed it brought in about $24.4 billion more than it can explain this year.
Some of that, I think, is money from Russia in violation of international standards. Turkey is also openly trading with Russia, buying oil to offset Russia’s losses from the EU.
That money’s moving into gold. This shows Russia is still able to finance its war, and that has negative implications for all of Europe.
The second major gold currency divergence is the Japanese yen. Gold priced in yen is up 22% over the past year.
Part of this, as with the pound, is due to the strength of the dollar. But it could also be a sign that investors are finally worried about inflation.
Inflation data for Japan is volatile. It’s chopped from highs of 0.4 to lows of -0.4 for the past eight years (barring an extremely low reading at the beginning of the pandemic).
To better understand the trend, I added a 52-week moving average. This shows us the year-over-year inflation trend, making it easier to see that the trend is decidedly up.
Gold’s divergence in these two currencies, compounded with worsening inflation in each country, is sending us signals that all is not well in the world. It’s only a matter of time before these problems hit the U.S.
A Historic Currency Reset Is Underway
Amber and I have also been looking at the pound itself. We noticed the speed of the decline, with the pound dropping more than 20% over the past year. This level has been associated with important historic events.
In the 1980s, the rapid appreciation of the dollar was being blamed for the loss of jobs in manufacturing. Treasury officials arranged for a meeting of their counterparts from Germany, Japan, the U.K., and France at New York’s Plaza Hotel in September 1985.
This resulted in an agreement that all of them would sell dollars to weaken the currency. The Plaza Accord worked — the dollar weakened as Japan’s exports became cheaper and that country rose to economic prominence.
Britain faced its next crisis in the early 1990s. Amber recently reviewed the country’s battle with George Soros, as he broke the Bank of England shorting the pound. When Soros won, that crisis ended and the initial membership in the eurozone was defined.
It would be more than 25 years before we saw another pound crisis. That one was due to the global financial crisis in 2008.
Dollar strength was driven by a flight to safety as traders questioned the stability of other currencies. That led to the rise of the Fed’s money printing operation that sustained growth for the next decade.
There’s no obvious culprit in this crisis. So far, we know the problem isn’t isolated to the U.K. Dollar strength against the euro and other currencies has reached crisis levels.
Maybe it’s Russia’s fault. Or China. Or someone else. That’s not as important as the fact that a global reset is almost certainly underway.
We need to focus on that as traders, and we will in the coming months.
Regards,Michael Carr, CMT, CFTeEditor, True Options Masters