Lombardi Publishing Corporation, a 28-year-old consumer publisher that has served over one million customers in 141 countries, is weighing in on how economic uncertainty in emerging markets has created bullish opportunities for gold bullion investors. —
“2014 is shaping up to be the perfect economic storm, with a global financial crisis, currency fiasco, and major stock market correction on the horizon,” says lead contributor and financial expert Michael Lombardi.
Back in 2009, in an effort to stimulate economic growth, the Federal Reserve and other major central banks around the world started lowering interest rates and printing money. While the central banks of the world wanted economic growth, Lombardi says, they inadvertently created the perfecting trading environment for major financial institutions and banks.
Lombardi explains that these institutions borrowed money from low-interest-rate countries and purchased bonds in high-interest rate countries, banking the spread. “In the world of finance, this is often referred to as the ‘carry trade.’ It works as long as the currencies of the low-interest-rate country and the higher-interest-rate country stay stable,” he adds. “But now, the easy money trade is backfiring, as the currencies of emerging markets have gone into free fall.”
China, the biggest economy in the emerging markets and second biggest in the global economy, benefited the most. As of March 2013, foreign currency loans and borrowing by Chinese companies from other countries was at $880 billion. In 2009, it was only $270 billion. (Source: Wilson, H., “Currency crisis at Chinese banks 'could trigger global meltdown,’” The Telegraph web site, February 1, 2014; http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10612451/Currency-crisis-at-Chinese-banks-could-trigger-global-meltdown.html.)
According to Lombardi, emerging markets like Turkey, South Africa, Russia, Brazil, India, and Argentina have seen their currencies depreciate since the Federal Reserve first announced it would reduce its monthly bond buying program in December 2013.
European banks have the biggest exposure to emerging markets, having lent them $3.0 trillion. British banks have loaned $518 billion to the emerging markets; Spanish banks come in a close second, with $475 billion of exposure; and French and Italian banks have each lent $200 billion to emerging markets. (Source: Slater, S., “European banks have $3 trln of exposure to emerging markets,” Reuters web site, February 3, 2014; http://www.reuters.com/article/2014/02/03/europe-banks-emergingmarkets-idUSL5N0L82MO20140203.)
“The money that was channeled into the emerging markets needs to eventually come back, but if currency prices in those emerging markets collapse, the question becomes whether the money can be paid back,” Lombardi observes. “And as the currencies of emerging markets’ economies deteriorate further, multinational American companies will report lower profits and their stock prices will suffer. We are seeing this pressure on stock prices now, as fear enters the market.”
“A flight to safety seems to be the next logical move for risk-averse investors,” he concludes. “Uncertainty in the emerging markets is creating certainty in the gold market. So far this year, gold stocks are up 10%, while the Dow Jones Industrial Average is down seven percent, and continues to look very risky.”
Founded in 1986, Lombardi Publishing Corporation, which has served over one million customers in 141 countries, is one of the largest consumer information publishers in the world. For more information on Lombardi Publishing Corporation, visit www.LombardiPublishing.com.
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