Why Currency Wars are Bullish for Precious Metals

By Walter Kurtz, Sober Look

As nations see Japan’s success in weakening the yen (see discussion), some begin to take notice. Emerging markets nations often attempted to devalue their currencies in the past in order to improve competitiveness. But these days developed economies are doing it as well. This morning the Russians called these policies “currency wars”, which is a good way to describe the latest developments. And such policies are not limited to Japan.

Bloomberg: – The alert from the country that chairs the Group of 20 came as Luxembourg Prime Minister Jean-Claude Juncker complained of a “dangerously high” euro and officials in Norway and Sweden expressed exchange-rate concern.

The push for weaker currencies is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of room. The risk is as each country tries to boost exports, it hurts the competitiveness of other economies and provokes retaliation.

Yesterday “will go down as the first day European policy makers fired a shot in the 2013 currency war,” said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London.

In an environment such as this it is somewhat surprising to see gold treading water.

Gold (spot price, source: Barchart.com)

The key concern on the part of precious metals investors is the risk of rising US dollar – as Europe and Japan focus on pushing their currencies lower. Stronger dollar tends to put downward pressure on commodity prices.

As discussed earlier (see post), the Fed’s activities in 2012 did not materially increase US bank reserves or the monetary base. 2013 however will be a different story, as the dovish Fed keeps buying assets at an accelerated pace (see discussion). That’s why in spite of this latest news from Europe on “currency wars”, the dollar remains subdued.

Dollar index (DXY, source: MarketWatch)

At least in the near term, precious metals and some other commodities should benefit from this global policy of “currency wars”, which include a large contribution by the Fed.

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Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

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  • whatisgoingon

    It is interesting to note that part of the way the central banks got out of the great depression was devaluing their currencies relative to gold to spur inflation. In a floating regime, they devalue currencies less overtly.

    Though perhaps the developed world’s central bankers could just as easily agree that next week or next month or whenever things get out of control that their currencies now relative to a basket of commodities is 5 or 10% less. [Like they did relative to gold in the 30s]. Actually Bernanke mentioned devaluation as one of the policy tools to defeat deflation.

  • markf

    The article does not live up to its title of “Why currency wars are bullish for precious metals”. It just says in the last sentence precious metals should benefit from the currency wars.

  • Just passing through….

    “It is interesting to note that part of the way the central banks got out of the great depression was devaluing their currencies relative to gold to spur inflation.”

    …or to put it another way they let the price of gold rise.

  • http://itsallbeta.com Rune

    Is it not real interest rates that drives precious metals? Depressing these through ZIRP and then asset purchases and what not should then set the trend. As long as the CB is not quasi-independent or less what politicians say should have little relevance.

  • eagle1003

    It would be presumptuous to assume that the U.S dollar will decline in the race to devalue currencies. If the U.S. loses the currency wars, and the dollar rises, how can that be positive for precious metals?