Tuesday, May 20, 2014

The Commodities Markets Are Rigged

Markets key off the dollar. I understand they’re not all denominated in US dollars, but all the major fixed income markets, commodities markets, et cetera, all reference back to the US dollar directly or indirectly.

So if you’re manipulating US interest rates, which the Fed is, then indirectly you’re manipulating every market in the world and therefore all the market signals we’re getting are not really good signals. They’re all the result of manipulation. So it’s not as if the Federal Reserve goes out every day and intervenes in the Australian dollar market or the South African rand.

I’m not suggesting that. What I’m saying is that just by manipulating US interest rates, you indirectly manipulate every market in the world, because all these markets are connected and we saw very clear evidence of that last summer, the summer of 2013. What happened in May 2013, Chairman Bernanke who was the Chairman of the Federal Reserve at the time, dropped a hint that the Fed might start tapering, reducing asset purchases which is a form of monetary tightening.

Well, there was a huge selloff in emerging markets, debt and currency and stock markets because there were these leveraged trades where people had borrowed in dollars and they’d gone out and bought Indian or South African or Brazilian stocks and bonds. You have to buy the currency to do that because you have to pay for it in local currency.

And then as soon as the Fed hinted they were going to raise interest rates, these investors or speculators had to unwind the carriage rates, so-called. So what did they do? They dump the stocks and bonds, sold the currency, bought dollars, paid off their debt and went to the sidelines.

Well, there’s an example of how just a hint, not even a policy action, it was just a hint by the Chairman of the Federal Reserve about future US interest rates caused a meltdown in emerging markets all over world. So there’s a good example of how everything’s interconnected. If you manipulate the dollar, you’re indirectly manipulating everything. So that’s how I would put it.

- Source, Jim Rickards via a recent Sprott Money Interview:

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