A country's domestic economic policy can be inflationary for that country with the attendant result that the country's currency becomes weaker vis-a-vis other currencies. The reverse isn't true. A country can't seek to weaken its currency in order to reduce domestic policy generated inflation. This would make no sense, because a currency only has a defined value relative to securities or currencies external to the country. So you have to make a distinction between foreign value of a currency and domestic value.
Foreign value is the purchasing power for other currencies. Domestic value is the purchasing power for goods and services sold inside a country. It isn't possible except in obscure situations to spend a currency in a country of different origin than the reference currency. You can't buy Ripple down at the local Mom and Pop with a yen note with Tojo's face on the front. They'll gun ya down.
It's wrong to think that Japan, for example, is pursuing a monetary policy which will cause the yen to fall. Admittedly Japan still clings to neo-mercantilism, but they see that doing so excessively brings on the negative internal consequences of deflation. Japan is goods and services supply oriented which puts them in a pseudo-deflationary mode. Extra currency production only brings their demand for output up to supply and so there is no currency weakening effect. This could change in two ways. If they persisted for several years with fiat or excess yen creation, the result would be somewhat inflationary and somewhat currency deflationary vis-a-vis dollar and Euro. The deflationary side relative to the dollar may not occur even though Japan is undergoing domestic inflation because the US may be out-inflating her. The other change could come from FED getting serious about tightening interest rates.
When FED even does some somewhat unexpected matched sales like was done on Friday, the dollar rallies. The sales may have only been due to a reduction of a recent overshoot in fed funds restraining operations, but it had the cold feel of high rates induced deflationary recession. I haven't felt that for 20 years.
I believe the ability for CBs to control their domestic circumstances relative to inflation is the reason the CBs entered the gold leasing game, rather than because they thought they could control the supply of gold. They are all hiding behind the intrinsic deflation of the last 20 years and don't realize that the control they think they have over economy is an illusion. The intrinsic deflation has induced an over confidence which has culminated in the BOE fire sale and it was the pre-announced sale which alarmed CBs world wide. The threat is that beggar-thy-neighbor sales of sovereign gold would return much of the gold monetary base to private hands. This has the consequence of relegating domestic economic control back to robber barons. Government fears nothing so much as loss of power.
Incidentally, the buyer of 60k gold calls is not sitting pretty, that is, not yet. You meant to say the sellers were looking good. The buyer was probably speculating on a more extended short squeeze than has so far occurred. Maybe some or most of the call position has been liquidated. Maybe they're still hanging in there. That's the side you know well and you know it's mostly the loser side. However, there is still a few weeks to go and I can't believe Ashanti, Cambior, et al, will get off so easily. My own sources are telling me of quiet near panic among hedgers. |
