Economic and Financial Background Australian Interest Rates & Precious Metal Prices
As a large commodity export driven economy, Australia will continue to face upward forces for inflation, interest rates and the AUD, as long as the U.S. Federal Reserve (US Fed) and other central banks around the world continue quantitative easing (printing money).
The problem is the US Fed has indicated it will keep pumping endless amounts of money into the system until unemployment has contracted significantly and U.S. consumers are spending again. This continual diluting and debasing of the USD may accelerate and go on for a very long time.
As the US Fed monopolises control of the global currency, they hold the power of the entire international monetary system. With a currency war having already broken out, the risk is for it to intensify.
The European Union are manufacturing and export dependent, if the Euro appreciates significantly against the USD, their exporting industry will continue to be hurt. The same applies to Japan and other exporting nations who do not have a currency pegged to the USD. It's against exporting economies interests to not chase the USD down in a "race to debase".
What this means for Australia is plain and simple:
- The commodity boom continues with the world flooded with money worth less; and
- With higher interest rates and a stronger AUD, imports will be cheaper and exports will be less globally competitive, the Australian manufacturing industry will be destroyed.
With our two tiered economy, the RBA does have some very hard decisions to make going forward. Do we chase the USD and other global currencies down, or do we crush our manufacturing industry. By chasing the USD down, we accept inflation outside of our current target zone, not raising interest rates as high, and maintain a diversified economy.
By fighting inflation through higher interest rates and consequently a higher AUD, we crush our manufacturing and export sectors, leaving Australia completely co-dependent on commodity exploitation.
The RBA understands all of this. Some recent quotes from their recent Policy Statement Media Release: "The Board is also cognisant of differences in the degree of economic strength by industry and by region." This addresses the two tiered economy.
"...the moderation in inflation that has been under way for the past two years is probably now close to ending... Inflation is likely to rise over the next few years. The outlook... assumes some tightening in monetary policy" These statements are accepting that: 1) Inflation will likely rise; and 2)The RBA's policy is taking into account our two tiered economy.
What do these dovish inflationary comments by the RBA translate to for precious metals?
The AUD will rise less in relative foreign exchange terms, leaving a situation where inflation also erodes the purchasing power of the AUD having a magnified impact on the appreciation of precious metals prices in AUD.
The bottom line is:
Gold and Silver are necessary base elements of a diversified investment portfolio. And if you have as little faith in the US economy as we do, then you also need to consider physical gold and silver as monetary safe haven alternatives.
As Ben Bernanke says, "like Gold, US dollars have value only to the extent that they are strictly limited in supply." With the supply of USD accelerating exponentially, and Gold and Silver supply limited to typical constraints, you don't have to be a prophet to forecast gold and silver prices denominated in US dollars and other global paper currencies is going higher.
