What Do Crashing Emerging Market Currencies Signal About Future Gold and Silver Prices?

crashes in emerging market currency purchasing power

For the past year, I’ve mentioned multiple times on my Instagram posts how many/most citizens in the developed world have ignored the critical importance of owning physical gold and silver as a hedge against crashing emerging market currencies and against the time when the Bubble of Everything implodes. In part, this is due to the fact that (1) most citizens in the developed world are ignorant of how much the price of gold has exploded higher against crashing emerging market currencies; and (2) most citizens suffer from the “if it doesn’t critically affect me, I won’t worry about it until it does” syndrome. Furthermore, central bankers, with their currency policy statement releases, as I’ve also discussed regularly, have provided plenty of hints about their intention to continue to destroy the purchasing power of fiat currencies further.

For example, if we look at the chart below, it is self-evident how much the price of one ounce of gold has risen against Mexican pesos over the past few years. Also, if we look at this more than a year-old post from my Instagram account, we know that Central Bankers in Mexico have a contingency plan if the devaluation of the Mexican peso proceeds to spiral downward even more quickly than it has over the past decade, as they revealed plans to print a 2,000 peso note, double the largest current 1,000 peso note, if “necessary”.  Though the Bank of Mexico remains noncommittal to a precise date regarding the launch of this new note, if I had to speculate on the timing of when a 2,000 peso note in Mexico will become” necessary”, I would guess that this time will arrive at some point within the next 18 to 24-months, if not sooner.

Furthermore, though I’ve often posted about gold’s monumental rise in developing nation’s currencies that has happened off the radar screen of most citizens of developed nations, I’ve also posted about gold’s very substantial rises against the currencies of some developed nations as well. Gold continues to rise and make new nominal highs against even currencies in developed nations as well, as Central Bankers are most interested in controlling the rise of gold’s price against the USD more so than any other major global currency for the simple reason that gold’s price continues unfortunately to be quoted solely in terms of US dollars on most major financial news shows around the world.  However, this hasn’t stopped gold from soaring against the currencies of other developed nations around the world, like Australia. Furthermore, back on 2 September 2019, I posted that Japanese citizens should buy gold priced in yen on this post.

Currently, as do all Central Bankers, the Central Bankers of Mexico continue to fib about real annual inflation rates, reporting that the yearly inflation rate in Mexico has now risen to 3.24% to start 2020. If that statistic were true and not severely underestimated, and inflation rates were low and under control as every Central Banker in the world states, except in nations in which massive inflation rates are in the high double figures and therefore undeniable, then there would be no need to openly discuss the future necessity of perhaps printing a 2,000 Mexican peso note (for which designs already exist). As we have seen in Zimbabwe and in Venezuela in recent history, the largest fiat currency note only experiences great ramp ups in denomination when runaway inflation is occurring. And like all Central Bankers, the Mexican ones also fib about true inflation rates as well as about their mission. The Bank of Mexico’s website declares the following, “El objetivo prioritario de Banco de Mexico es mantener un inflacion baja y estable”, which translates to “The primary goal of the Bank of Mexico is to maintain a low and stable inflation rate.”

In November 2018, the Bank of Mexico opened a second banknote printing facility, almost 50 years after its first facility began operations. “The new factory will allow the Bank of Mexico to keep up with the increased demand for banknotes,” said governor Alejandro Díaz de León at the time. Mexican Central Bankers claim that the vast majority of new notes that they print are necessary to replace worn and tattered notes currently in circulation, stating a necessity to withdraw notes from circulation after only three to four years. However, since this is a short lifespan compared to the lifespans of fiat currency notes in all other nations, this explanation by itself makes little sense, and the need to print so many new notes is likely also partially attributable to the rapid inflation rate in Mexico that necessitates more notes in circulation to buy the same goods and services as in prior years. For example, in the US, according to the US Federal Reserve, one dollar bills have an estimated life span of 6 years, five dollar bills have an estimated circulation life of about 5 years, and twenty dollar notes stay in circulation for an average of about 7.7 years. Of course, the material of the note as well as the number of times it exchanges hands per year will impact the note’s lifespan. However, since the MXN (Mexican peso) note has only transitioned to polymers in recent times, its paper mix and the US dollar’s cloth mix should be fairly comparable in their circulation lifespans.

Furthermore, as the MXN has historically served as an example of a crashing emerging market currency, with Central Bankers simply lopping off zeros from the end of notes, as they did in 2003 when they turned a 1,000 peso note into a 1 peso note, the Bank of Mexico often has a need to print new notes due to devaluation events that make the notes in circulation obsolete. Central Bankers in Mexico state that they have an “inventory policy” for all new to used peso notes in circulation that also takes into account the impact of “natural disasters”. In my opinion, the rapid purchasing power devaluation of the Mexican peso is a “natural disaster” that has initiated the printing of a significant number of new peso notes. For decades, the main peso printing facility in Mexico was domiciled in Mexico City, but a second printing facility was recently opened in Guadalajara to meet increasing demand for peso notes. For example, in just 47-years from 1970 to 2017, the printing facility in Mexico City increased the number of printed banknotes more than seven times from 201M notes to 1.45B notes.

When the 2000 Mexican peso note is eventually introduced, and it is only a matter of time in my opinion for this event to materialize, it will come as no surprise to any Mexican citizen, who is by now, undoubtedly accustomed to significant overnight devaluations as their currency history is littered with such events. And in my opinion, because the contagion of rapid devaluation of currency purchasing power will inevitably spread from the developing world to the developed world, the best way to prepare for such events is through physical ownership of precious metals. The spread of this currency contagion is inevitable because every Central Banker’s answer to any type of crisis, even healthcare crises, is the singular solution of slashing interest rates. Like the US Central Bank, the People’s Bank of China injected their markets with an infusion of cash, though for now, much smaller amounts (US$173B thus far against multiple trillions infused by the US Central Bank from September of last year) and through slightly different mechanisms (overnight repo market in the US versus reverse bond repurchase agreements in China). The PBOC also cuts its interest rate on short-term cash lent to commercial banks. However, given the history of Central Banker policy moves over the past decade, it is near guaranteed that the PBOC will keep pumping more cash into the Chinese economy and keep slashing interest rates further in response to economic weakness created by the Wuhan coronavirus epidemic. And that translates to a simple four word message: Buy gold. Buy silver.

J. Kim

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