Sunday, November 23, 2014

What Happens When Your Currrency Falls?

One of the keys we watch constantly here on this blog is the stability of the US dollar, both against other currencies and against gold. Since our theme here is that monetary system change that involves the US dollar losing its sole global reserve currency status is coming, it makes sense to watch the dollar to see if it is dropping. That would be a very strong signal that demand for the US dollar as a global reserve currency was falling.

So what happens if your currency starts losing value sharply? US citizens have not really seen this happen yet, so its hard for them to visualize what happens. The dollar has lost a lot of value for sure, but it has happened over a long term period in mostly slow and steady increments (a US dollar has lost massive purchasing power over the last 100 years, but an ounce of gold still has the same or better purchasing power as it did 100 years ago).

For a look at what happens when your currency starts sinking fast, let's see how things are going over in Russia lately. Here is an article that talks about the pain the sharp drop in the ruble is causing for ordinary Russians. Below are some quotes from the article that illustrate how hard it makes things for people. Below that is a link to a chart for the price of gold in rubles. Gold has not done much in terms of its price in US dollars this year. But take a look at the link below to the chart of the gold price in rubles. Gold is moving up sharply just as you would expect when the currency is losing value sharply. First, here are some quotes:


"In Rostov-on-Don, a Russian port city of 1.1 million people just east of the Ukrainian border, signs of the fallout from the ruble's collapse are everywhere."

"There's the 27-year-old entrepreneur whose storage facility is packed to the ceiling with imported Spanish tiles that his clients can't afford anymore. There's the accountant who had a front tooth pulled, only to realize she didn't have enough money to pay for the imported implant needed to fill the gap. And there's the interior designer who's resigned herself to getting no year-end bonus after watching sales plunge at the European furniture store she works in."

"For Artyom Popov, the 27-year-old entrepreneur in Rostov-on-Don, the ruble devaluation has been a disaster.

Like his mother before him, Popov specializes in tracking down foreign products, ranging from fur coats to construction materials, and selling them to clients across the city.

Sales on his No. 1 product -- kitchen and bath tiles that he picks out himself in Spain -- are down 60 percent since July, Popov estimates. He'd been traveling to Spain every few months to purchase more tiles but said he has no plans to head back over anytime soon.

When clients see the price in euros, they say "it's fine," according to Popov. "Then I calculate that in rubles and I see it's psychologically hard for them to pay 60 rubles for something that used to be 45," Popov said as he maneuvered his black BMW X5 through traffic in Rostov-on-Don one afternoon this month. "They say it's too expensive and leave."

"Sticker shock also applies to teeth repair.

After having her upper right canine tooth pulled, Ulyana Lyubyatina said she was told in early September that an implant made in Italy would cost 18,000 rubles, or about $480 at the time -- "a huge sum of money for me."

Things only got worse from there.

A week later, the dentist's office informed the 48-year-old accountant that it had run out of the implants and needed to reorder at a price of 24,000 rubles. Earlier this month, she said the price climbed again, to 25,000 rubles.

Unable to afford the import, yet loathe to buy a Russian-made implant that she says she wouldn't trust, Lyubyatina is stuck with a temporary plastic tooth.

"I don't know what to do," she said, shouting over the traffic in downtown Rostov-on-Don as she stood in line at a bank ATM. "I hope the ruble chaos will eventually calm down. What is going on now is crazy."

Now take a look at the price of gold in rubles on this chart by clicking here.

Is there any lesson we can learn from this? I believe so. If and when the day arrives that the US dollar starts to lose value sharply like the ruble has, we can expect the same problems to show up here very quickly. And we can expect the price of gold in US dollars to rise sharply as it always has when a currency loses value.

This is why so many experts we cite on this blog advise acquiring some amount of insurance in the form of precious metals while the US dollar is still holding up. If events happen that cause it to drop sharply in value, it will be too late to get the insurance hedge needed to deal with the problem. It's impossible to know the time frame in advance.

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