Reader Question: “Why would a fall in the NZ dollar be a negative?”

Gold Survival Gold Article Updates

Mar 18, 2014

This Week:

• If/When the US Dollar Collapses, What Will Gold be Priced in?
• Reader Question: “Why would a fall in the NZ dollar be a negative?”
• Precious metals have been due a pull back

We’re a day early with this weeks update as we are “out of office” tomorrow – although still taking orders and answering quote requests. Just not time to write a full email then though.

This week we have a couple of answers to reader questions. Our feature article this week was written in response to the question “If/When the US Dollar Collapses, What Will Gold be Priced in?” Click the link to read that or you can read it further down this email under “This Weeks Articles:”

We also had an excellent question from another reader in response to something we wrote last week about the “risk” of a fall in the NZ dollar. So we’ll get to that soon. Actually on the topic of questions please let us know if you have any. We’re always looking for something to write about. Just hit reply to this email or go to our “Ask Us a Question” page. 

First though, as always, a look at gold and silver prices and their movements from a week ago (6 days in this case).

Gold this morning has fallen sharply on the back of a stronger kiwi dollar and a lower USD gold price overnight.

It is down $31.58 per ounce or 1.97% since last Thursday to NZ$1574.79.

Silver is down a hefty 84 cents or 3.35% to NZ$24.22

The NZ Dollar appears to have risen on the back of the announcement that it is now the 6th currency to gain direct convertibility to the Chinese Yuan/Renminbi. Further evidence of the Chinese looking to “internationalise” their currency. (Coincidentally we mention this in this weeks feature article too.)

Looking at the charts 

It’s difficult to make a call on where to from here for either metal. 

Gold in NZ dollars broke through the significant 200 day moving average (MA) during the week but has since fallen back below it. With the 50 day MA having turned back up again we are not far off seeing the “golden cross”. The technically important point where the 50 day MA crosses and heads above the 200 day MA. But with the current strength in the NZ dollar it will take the US gold price rising further to achieve this.

Meantime silver continues to lag gold. In fact priced in NZ dollars silver is again only about $1 an ounce above the lows of last year. With the copper price falling sharply over the past week or 2, this could be putting the brakes on silver – given it’s industrial uses. As “Dr Copper” – as it’s widely referred to – is used as an indicator of global economic strength/growth.

Delicately poised we’d say. 

It seems many people expect a fall in the global economy so it might not – well not yet anyway. But it wouldn’t be a surprise to see silver continue to remain weak relative to gold given how copper is acting.

Reader Question: “Why would a fall in the NZ dollar be a negative?”

After last weeks email we received an insightful question from a reader. He said:

—–

“In your newsletter you say: 

“we still think it makes sense to be concerned about a decent shock causing the NZ dollar to take a nasty fall at some point.”

I’m just wondering why you take a negative position on a downward movement of the NZ dollar. Central banks and Keynesians tend to be constantly saying that countries benefit from a weaker currency. For example the RBNZ apparently introduced the LVR limits to address house price inflation without causing currency appreciation.

What do you think?”

—–

We thought he might not have been the only one with that thought so here’s our response…

—–

“When we said “nasty fall” the reason why it would be nasty is simply because it would raise the cost of living for everyone. This is something the politicians and central bankers just gloss over. The high dollar is currently protecting us from rising costs. If it fell and fell sharply like it did in 2008/09 this would cause sharp rises in the likes of fuel and everything else we import. And given NZers debt levels are rising again, higher living costs might not be well handled.

The central planners never bother to discuss or even mention this.

So in short, really we were saying we see gold and silver as a hedge against a fall in the NZD. As if the NZD falls the prices of just about everything will rise. And so holding some gold and silver will likely protect purchasing power in this event.

Of course a fall in the NZD may have some positive improvement in the short term in terms of making our exports more affordable so we sell more etc. However the Keynesians also never bother to discuss how not everyone can have a cheap currency at once. This is the “beggar thy neighbour”/currency war scenario where everyone is trying to cheapen their currency at once. So while a country may experience some positives to begin with, if everyone else is after the same thing then everyone just gets poorer on a relative basis.

In regard to the LVR limits the RBNZ is definitely talking up the effectiveness of these. They said in their statement today [Thursday 13 March 2014]  “There has been some moderation in the housing market. Restrictions on high loan-to-value ratio mortgage lending are starting to ease pressure, and rising interest rates will have a further moderating influence.”

So they think they have it sorted there. But odds are there will be unforeseen consequences to these actions too and the bankers (and borrowers) will find ways around them. The central bankers seem to think they can pull on one lever and then pull on another and make everything AOK. We have our doubts in the long run.

That’s not to say we are wanting a higher dollar, rather we would prefer not to have the current monetary system at all.

Although in a balanced system a high dollar would be a positive sign and something to aim for.  It’s just the nature of the monetary system that it breeds imbalances. I think one of the best things I’ve seen written on the topic was this piece by Mexican billionaire Hugo Salinas Price.

The Gold Standard – Generator and Protector of Jobs

He outlines how the current monetary system breeds structural imbalances. Definitely worth reading if you haven’t before.

Here’s another of his on a similar topic too. 

Some Thoughts on International Reserves

Hopefully that answered your question. Please let me know if it didn’t or if anything wasn’t clear.

Thanks

Glenn.”

—-

Likewise let us know if it didn’t make sense to you too! Just hit reply to this email with any questions.

Final Thoughts: Precious metals have been due a pull back after such a strong run. 

We may have seen this already overnight or it could be the start of a larger correction.

However the counterpoint to the idea that a decent correction is due, is that we are seeing very little purchasing of gold and silver bullion currently. In fact March has been as quiet as we can remember for a long time. Our contacts within the bullion industry here in NZ report much the same.

In the past these very quiet times have often proven to be good times to be buying from what we’ve seen. And as we pointed out last year when everyone is buying it is often the opposite – not the best time to buy… “Our hunch is that the bottom will arrive when there is very little buying interest (in the western hemisphere at least!).” 22 May 2013.

This was the case in December with little interest and was one of the reasons we are fairly confident the bottom is now in for gold and silver.. Even though demand picked up a little in January and February, this month it remains very, very low.

So while it might make sense to have even more of a pullback in price from here, this may not be the case. Bull markets run with the fewest people on board and there certainly isn’t a rush for tickets aboard the “Gold Train” or the “Silver Express” currently!

But if you’d like to avoid the masses and “get on board” then get in contact. And if you’re new and have any questions then please let us know.

This Weeks Articles: 

Gold breaks out

2014-03-12 22:33:27-04Gold Survival Gold Article Updates Mar 12, 2014 This Week: RBNZ raises rates Gold breaks out Capital Gains Tax on Precious Metals in New Zealand – Is There Any? Clamping down on cash transactions   This week our feature article is on the topic of tax on capital gains on precious metals in NZ.  See […]read more…

If/When the US Dollar Collapses, What Will Gold be Priced in?

Doug Casey’s 9 Secrets for Successful Speculation