The interesting news these days is all about currency devaluation in the emerging markets. Due to the tapering of the Federal Reserve, we now have an unintended consequence. All of the cheap money supplied by the Federal Reserve that went to the emerging markets is now coming home. Some of the emerging market countries are already feeling this pressure of currency outflows. As a result, they are raising interest rates at a very fast pace which collapses their economies. Although emerging market equities have better valuations than developed market equities, we still see a monthly outflow of $12 billion out of emerging market funds (VWO). All of this money is now flowing back into U.S. bonds and more recently into precious metals.
Here is a summary of all currency devaluations of the emerging markets.
Kazakhstan devalued the currency just recently from a USD to KZT exchange rate of 153 to 185. That's a 20% devaluation in just a few days. Their foreign currency reserves are at record lows of $24.5 billion. Their reserves have been dropping since 2011. This is why Kazakhstan is importing a lot of gold these days to increase its reserves.
Turkey has kind of the same problem as Kazakhstan. Turkey also kept importing gold to raise their reserves and protect itself from currency devaluation. The lira has been devalued by more than 50% since the start of the crisis in 2008.
Venezuela devalued its Bolivar another 30% from 4.3 to 6.3 against the U.S. dollar.
Argentina devalued its peso already since 2009 and it is getting to a critical inflection point where we will see defaults and hyperinflation. The reason for all of this is again a low amount of foreign currency reserves.
Nigeria will be the next to devalue its currency in 2015, as the country's foreign currency reserves are at record lows.
Sudan has already devalued its currency by more than 50% against the U.S. dollar.
Other than these extremes, we see trouble in some other emerging market currencies of countries like Russia. You can easily see on this chart below that since the start of QE in 2009, the ruble strengthened. But since the taper talk in 2013, the ruble started to weaken considerably.
We see exactly the same trend in the Brazilian real.
And in the Indian rupee.
The conclusion is that ever since the Federal Reserve started tapering, all of these emerging market currencies started to witness outflows. There are exceptions like Vietnam which has stronger fundamentals, but the overall trend is down. As a result, these countries are raising interest rates 2 or 3% overnight to curb inflation. But this on itself will crash the economies of these emerging markets. The emerging markets that have the least foreign exchange reserves are particularly vulnerable and should be avoided by investors. Especially when Janet Yellen stays on her course of tapering. But I expect an abrupt end to tapering when the emerging markets continue their decline. Gerald Celente reports that in January 2014 alone, we already saw $3 trillion of global assets being wiped out, and this cannot continue. We will see some kind of stimulus in the middle of this year, and that will be very beneficial to one particular asset: gold.
Inflation in these emerging markets has spurred this particular rising trend in gold. If these people all had gold in their possession, they would benefit greatly from this. They wouldn't be affected by this devaluation. This is why we have seen a surge in the gold price since the end of December 2013. I believe this trend will continue as emerging market countries will need to keep buying gold to protect themselves against currency devaluation. Investors can benefit from this trend by buying gold (GLD) or gold mining shares like the Market Vectors Gold Miners ETF (GDX).