Analysts: Currency War Is Good for Gold

Tuesday, 12 Mar 2013 08:01 AM

By Michelle Smith

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A currency war poses global economic risks, but analysts foresee at least one clear beneficiary — gold.

Currency war is essentially a term referring to competitive currency devaluation. The strength and weakness of a nation's currency has implications on trade since it affects how expensive imports and exports are.

Currency and its value also have implications for gold. The metal's price is denominated in U.S dollars, so a rising greenback means it requires more of other currencies to purchase gold. A falling dollar has the opposite effect.

Forbes Columnist:
‘Who the Hell Cleared This?’

As investors have become notably more pro-risk this year and have seen less need for safe havens, there has been a lack of momentum in the gold market. A currency war, or even the risk of one, could change that, analysts say.

While some debate whether a currency war will erupt, MarketWatch says others like Kathy Lien, managing director at BK Asset Management, believe that this action has already been quietly underway for “some time now.”

Central banks have instituted debasing monetary policies, such as the Federal Reserve with its multiple rounds of quantitative easing (QE). Then, there are the likes of the Swiss National Bank, which has chosen brazen intervention in the currency markets.

This does not mean the world is destined to witness an “outright publicly bloody battle,” Lien told MarketWatch. “But if the war heats up investors could flock back into the safety of gold.”

Many central banks have already been choosing to hold more of their reserves as gold. A currency war is also expected to be a driver of this trend.

“We are now moving irrevocably to a time when gold will measure currencies, not currencies measure gold,” said Julian Phillips, founder at GoldForecaster.com.
He predicts that what lies ahead is a time when gold rises against all currencies.

Nouriel Roubini, a New York University economics professor, warned in an article for Project Syndicate that weakening the dollar to increase exports won’t work if other central banks also pursue QE. It becomes a zero-sum game, resulting in “‘QE wars’ as proxies for ‘currency wars.’”

While many experts have warned about QE creating asset bubbles and future inflation, Fed Chairman Ben Bernanke has downplayed those concerns.

“To this point we do not see the potential costs of the increased risk taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation,” Bernanke said in recent testimony to Congress.

Still, he said the Fed takes risks of financial instability very seriously.

Forbes Columnist: ‘Who the Hell Cleared This?’

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