Gold bars are displayed at a branch of Mitsubishi Materials Corporation in Tokyo
Gold bars are displayed at a branch of Mitsubishi Materials Corporation in Tokyo Reuters

The Japanese yen and gold may be in trouble as countries around the world get set for budget austerity and rate hikes in 2011.

Gold’s rally in the past few years has been driven by the debasement of fiat currencies and concerns about budget deficits. Meanwhile, the Bank of Japan continues to print more money and the Japanese government continues to accumulate more debt.

So, as interest rates rise and budget deficits fall across the world, the yen and gold are likely to underperform.

In Europe, the mentality for budget austerity is already firmly established. It’s been forced on countries like Greece. Countries like Spain voluntarily swallowed the bitter bill. Even Germany pushed through an austerity package just to be safe.

On the monetary side, the European Central Bank (ECB) raised interest rates as soon as inflation inched a tad above the target rate of 2 percent annually. It obviously takes inflation targeting very seriously and will keep on raising interest rates to contain inflation expectations.

The ECB’s hawkish policy will also allow other European central banks -- like the Swiss National Bank -- to raise their own interest rates without the fear of causing their currencies to appreciate too much.

Most booming emerging market economies do not have budget deficit problems. Moreover, their interest rates are well above financial crisis levels.However, many of them buy US dollars to keep their currencies undervalued, thereby importing the Federal Reserve’s loose monetary policy.

But just a few weeks ago, they have begun the process of appreciating their currencies in order to curb inflation. By doing so, they’ll import less inflation from the Federal Reserve.

The United States is definitely a few steps behind Europe and emerging market countries, but the ideologies of fiscal austerity and sound monetary policy have already been established.

The Federal Reserve is receiving a lot of heat for its loose monetary policy. The criticisms have come from financial experts, politicians, and even from a few of the Federal Reserve’s own members.

Meanwhile, Congressional Republicans – pushed by Tea Party candidates who won on anti-government spending campaigns – are putting their foot down and cutting spending from every single bill.

The fiat currencies of all these countries will benefit from the new ideology of budget austerity and rate hikes in 2011. Gold and the yen, therefore, will likely depreciate against these fiat currencies.

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