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The Petrostate Hex: How Plunging Oil Prices Affect Currencies

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The Petrostate Hex: How Plunging Oil Prices Affect Currencies

The Petrostate Hex: How Plunging Oil Prices Affect Currencies

Every day, the world consumes 93 million barrels of oil, which is worth $4.2 billion.

Oil is one of the world’s most basic necessities. At least for now, all modern countries rely on oil and its derivatives as the backbone of their economies. However, the price of oil can have significant swings. These changes in price can have profound implications depending on whether an economy is a net importer or net exporter of crude.

Net exporters, countries that sell more oil abroad than they bring in, feel the sting when prices plunge. Less revenue gets generated, and this can impact everything from balancing the budget to the value of their currency in the world market.

Net importers, on the other hand, benefit from lower prices as it decreases input costs for production. For example, a country like Japan only meets 15% of its energy needs domestically, and must import 3.5 million barrels of oil each day. A lower oil price significantly decreases these costs.

Currency Swings

For many major net exporters of oil, changes in oil prices are highly correlated with their currencies. With oil prices crashing over the last year, currencies such as the Canadian dollar and Russian ruble have been highly impacted in terms of USD.

For example, the ruble is down over 40% since the price of oil began to crash in 2014. With a breakeven cost of $105/bbl, the dropping price of crude as well as dwindling ruble have sent ripples through the Russian economy.

Central Bank Policy

The impact of oil on currency depends on how central banks approach policy:

Floating exchange rate: The exchange rate is determined by supply and demand.

Fixed exchange rate: Countries with fixed exchange rates continuously arrange intervention to keep the rate the same.

Managed float: The central bank occasionally intervenes to “smooth out” the exchange rate.

Currency Correlations

The price of oil typically has the largest effect on countries with floating exchange rates such as Canada, Norway, or Mexico. Over the last 15 years, the loonie (-0.42), krone (-0.46), and peso (-0.31) have all had large negative correlations in exchange rates (paired with USD) against the price of oil.

Meanwhile, countries that have pegged their rate tend to feel the impact of oil price swings elsewhere in their economy. This is because such countries have to buy or sell currencies on the open market to maintain the currency peg. Another method that can be used is to enforce a particular exchange rate by making it illegal to trade currencies at other rates, but this can often create a black market.

As a result, countries with fixed-rate policies such as Venezuela, Saudi Arabia, and Qatar have little to no correlation in their exchange rates (paired with USD) against the price of oil.

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Central Banks

The Silver Series: The Start of A New Gold-Silver Cycle (Part 1 of 3)

As the decade-long bull run shows signs of slowing, is it time for precious metals to shine? Here’s why it could be the start of a new gold-silver cycle.

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The world has experienced a decade of growth fueled by record-low interest rates, a burgeoning money supply, and historic debt levels – but the good times only last so long.

As the global economy slows and eventually begins to retract, can precious metals offer a useful store of value to investors?

Part 1: The Start of a New Cycle

Today’s infographic comes to us from Endeavour Silver, and it outlines some key indicators that precede a coming gold-silver cycle in which exposure to hard assets may help to protect wealth.

The Start of a New Gold-Silver Cycle

Bankers Blowing Bubbles

Since 2008, central bankers around the world launched a historic market intervention by printing money and bailing out major banks. With cheap and abundant money, this strategy worked so well that it created a bull market in every sector — except for precious metals.

Stock markets, consumer lending, and property values surged. Meanwhile, the U.S. Federal Reserve’s assets ballooned, and so did corporate, government, and household debt. By 2018, total debt reached almost $250 trillion worldwide.

Currency vs. Precious Metals

The world awash in unprecedented amounts of currency, and these dollars chase a limited supply of goods. Historically speaking, it’s only a matter of time before the price of goods increases or inflates – eroding the purchasing power of every dollar.

Gold and silver are some of the only assets unaffected by inflation, retaining their value.

Gold and silver are money… everything else is credit.

– J.P. Morgan

The Perfect Story for a Gold-Silver Cycle?

Investors can use several indicators to gauge the beginning of the gold-silver cycle:

  1. Gold/Silver Futures

    Most traders do not trade physical gold and silver, but paper contracts with the promise to buy at a future price. Every week, U.S. commodity exchanges publish the Commitment of Traders “COT” report. This report summarizes the positions (long/short) of traders for a particular commodity.

    Typically, speculators are long and commercial traders are short the price of gold and silver. However, when speculators and commercial traders positions reach near zero, there is usually a big upswing in the price of silver.

  2. Gold-to-Silver Ratio Compression

    As the difference between gold and silver prices decreases (i.e. the compression of the ratio), history suggests silver prices can make big moves upwards in price. The gold-to-silver ratio compression is now at high levels and may eventually revert to its long-term average, which implies a strong movement in prices is imminent for silver.

  3. Scarcity: Declining Silver Production

    Silver production has been declining despite its growing importance as a safe haven hedge, as well as its use in industrial applications and renewable technologies.

  4. The Silver Exception

    Silver is not just for coins, bars, jewelry and the family silverware. It stands out from gold with its practical industrial uses which account for 56.1% of its annual consumption. Silver will continue to be a critical material in solar technology. While photovoltaics currently account for 8% of annual silver consumption, this is set to change with the dramatic increase in the use of solar technologies.

The Price of Gold and Silver

Forecasting the exact price of gold and silver is not a science, but there are clear signs that point to the direction their prices will head. The prices of gold and silver do not accurately reflect a world awash with cheap and easy money, but now may be their time to shine.

Don’t miss another part of the Silver Series by connecting with Visual Capitalist.

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Decentralized Finance: An Emerging Alternative to the Global Financial System

What is decentralized finance? Learn how technology is changing the rules of the game, creating the potential for a new financial system to emerge.

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Decentralized Finance: An Emerging Alternative

The global financial system has created massive wealth, but its centralized nature means the spoils have gone to the people who are best connected to the financial centers of the world.

As global inequality continues to rise, how can wealth building tools become more accessible to the rest of the global population?

Luckily, technological developments and their rapid adoption make this the right time for a new decentralized financial system to emerge:

  • The Internet: 3.9 billion users by the end of 2018
  • The proliferation of smartphones: Two-thirds of the unbanked have mobile phones
  • Digital banking: over 2 billion users by end of 2018
  • Bitcoin and Blockchain: the emergence of new public blockchains

Today’s infographic comes to us from investment app Abra, and it highlights how public blockchains could help to enable a decentralized finance system.

What is Decentralized Finance?

Decentralized finance describes a new decentralized financial system that is built on public blockchains like Bitcoin and Ethereum. After all, Bitcoin and Ethereum aren’t just digital currencies — they’re foundational open source networks that could be used to change how the global economy works.

There are six primary features that differentiate public blockchains from the private networks used by governments and traditional financial institutions:

  • Permissionless: Anyone in the world can connect to the network
  • Decentralized: Records are kept simultaneously across thousands of computers
  • Trustless: A central party isn’t required to ensure transactions are valid
  • Transparent: All transactions are publicly auditable
  • Censorship Resistant: A central party cannot invalidate user transactions
  • Programmable: Developers can program business logic into low-cost financial services

In such a financial system, users will have access to apps that use public blockchains to participate in new open global markets – but how would this shape the global financial system for the better?

The Potential Impact of Decentralized Finance

Here are five ways that decentralized finance will have an impact on the world:

1. Wider Global Access to Financial Services

With decentralized finance, anyone with an internet connection and a smartphone could access financial services. There are a variety of barriers that prevent access in the current system:

  • Status: Lack of citizenship, documentation, credentials, etc.
  • Wealth: High entry-level funds required to access financial services
  • Location: Vast distance from functioning economies and financial service providers

In a decentralized financial system, a top trader at a financial firm would have the same level of access as a farmer in a remote region of India.

2. Affordable Cross-Border Payments

Decentralized finance removes costly intermediaries to make remittance services more affordable for the global population.

In the current system, it’s prohibitively expensive for people to send money across borders: the average global remittance fee is 7%. Through decentralized financial services, remittance fees could be below 3%.

3. Improved Privacy and Security

In decentralized finance, users have custody of their wealth and can transact securely without validation from a central party. Meanwhile, in the current system, custodial institutions put people’s wealth and information at risk if they fail to secure it.

4. Censorship-Resistant Transactions

In a decentralized financial system, transactions are immutable and blockchains can’t be shut off by central institutions like governments, central banks, or big corporations.

In places with poor governance and authoritarianism, users can divest to the decentralized financial system to protect their wealth. For example, Venezuelans are already adopting Bitcoin to protect their wealth from government manipulation and hyperinflation.

5. Simple Use

Plug and play apps will allow people to intuitively use decentralized financial services without the complexity of the centralized system.

With a decentralized system, a woman in the Philippines could receive a loan from the U.S., invest in a business in Colombia, and then pay off her debt and purchase a home – all through interoperable apps.

The Potential Blue Sky

Unless governments and central banks suddenly cease to exist, it’s difficult to imagine a world where decentralized finance completely replaces their centralized counterparts.

But what if they can co-exist?

Public blockchains can interact with the traditional financial system to create a new hybrid model:

  • Users could conduct economic activity on public blockchains and exchange their new wealth into the centralized system.
  • Users could hedge against systemic risk by diversifying their wealth holdings in both the central and decentralized system.

Like the internet with knowledge, decentralized finance could help democratize the financial system.

But will we allow it?

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