-- Posted Thursday, 2 June 2011 | | Disqus
By: Dr. Jeffrey Lewis
While the US markets were closed to observe Memorial Day, Russia’s central bank acted to raise interest rates to cool inflation. This may have ordinarily registered as a normal event for a central bank, but nothing is normal when the US central bank, the Federal Reserve, refuses to hike rates in the United States.
In reality, Russia’s rate hike may do very little to keep US dollars from pouring over international lines and into Russia. Investors who see the US dollar as a perpetually weakening currency are empowered by rate hikes such as this one from the Russian central bank. In hiking the overnight deposit rate to 3.5% from 3.25%, US dollar denominated investment capital has even more reason to flow into an already overheated Russian market.
Where this rate hike may force an internal slowdown in Ruble-denominated borrowing, it hardly stops investors who are riding the waves of 2011’s currency wars. Instead, investors will find it profitable to borrow in the United States at 0-.25% and lend in Russian Rubles for 3.5% annually. With 10:1 leverage, as is commonly employed in foreign exchange, investors bring home a 32.5% annual return, plus the difference in the exchange rate. That is, if the US dollar continues to weaken, investors may make far more than 32.5% annually on their cash—they would make 62.5% if the US dollar lost another 3% of its value in the next year.
Rates are Credit Weapons of Mass Destruction
The United States is currently winning the currency war because we have no fear in our position. With government debts soaring, and the US markets weakening, we have little to lose in pushing our currency to record lows. Our fiscal problems, helped with foreign exchange investors, are now other country’s problems. Russia just made it infinitely more attractive for investors to double-down on short-dollar, long-Ruble bets for long-term carry trade profits.
But where this foreign exchange effect is universal, Russia’s action is more important than other nations, mostly because they’re still a net-oil exporter. Oil, of course, is still priced in US dollars.
So where Russia may act to raise rates and attract dollar-denominated investment capital, US dollar weakness against the Ruble should only continue. With the Ruble gaining value against the dollar, oil from Russia that is sold in US dollars:
1) Increases Russia’s holdings of US dollars
2) Is less profitable domestically, since it will take more dollars to buy the same Ruble.
When oil is less profitable to produce, Russia has less incentive to produce more of it, and it is certain that they’ll start holding back in order to obtain higher prices in the future. Therefore, on top of dollar weakness, the world markets will also have to deal with higher energy prices, which will only further stoke the fires of inflation in the United States.
Silver investors would be wise to watch carefully central bank activity around the world. Typically anti-inflationary measures are not anti-inflationary when there is a lone central bank that has nothing to lose in pushing its currency down to zero. This lone central bank is none other than the most powerful central bank in the world—the Federal Reserve.
Further dollar weakness is certain, and commodity strength, especially from monetary commodities like silver, is a natural effect that stems from an inflationary cause.
Dr. Jeffrey Lewis
www.silver-coin-investor.com
-- Posted Thursday, 2 June 2011 | Digg This Article
| Source: GoldSeek.com
