There is growing concern that a currency war may break out soon. That would be bad news for the global economy but good for gold prices.
At the recent G-20 summit in Australia, discussions about currencies and exchange rate volatility made it back on the agenda after more than a year hiatus. At the last G-20 meeting in Russia, considerable effort was spent calming down talk of a currency war.
Since then, the United States has emerged in the strongest shape among the slowly healing and mediocre global economy. As a result, the Federal Reserve has begun tapering its bond-buying program and is now focused on when to raise interest rates and unwind all the liquidity created by its stimulus programs.
But the EU and Japanese economies have gotten worse. And the Chinese economy appears to be headed toward a harder landing. Taking a cue from the huge "all-in" stimulus from the Fed, the European Central Bank and the Bank of Japan are starting to dramatically increase their already-accommodative monetary policies to stimulate their economies. Even the Peoples Bank of China has begun a modest stimulus program.
The ultimate impact of all that government intervention is the competitive devaluation to the dollar. With the dollar already at new highs relative to the next 16 major currencies, imports are cheaper (which is good for the American consumer) and exports are more expensive (which is bad for American business and jobs). By devaluing their currencies, other countries are making their exports to the U.S. even cheaper. That results in slowing down U.S. job growth, as Americans buy more imported goods instead of U.S. goods, and accelerating foreign job growth, as foreign businesses make more to sell more to the U.S.
Unlike the impact of a currency war, eventually equilibrium happens when the free market determines exchange rates. That's because the rates are based on economic fundamentals. But with artificial intervention by governments, especially with divergent monetary policies like the U.S. versus the world, the result is usually more volatility and uncertainty in global financial markets.
For example, the U.S. might decide to devalue the dollar to align with a perceived equilibrium and prevent the loss of more domestic jobs. But that might trigger runaway inflation and derail our fragile recovery.
Ultimately, no one wins a currency war. It is a race to the bottom.
But one benefactor is gold. When all currencies are worth less, investors flock to tangible assets because their value is based on intrinsic characteristics and not on government credibility or monetary policy. Gold is the most popular of these types of tangible assets. Gold bullion coin sales, a reliable indicator of individual investor demand, jumped in September to 48,500 ounces, which is almost double the sales in August and is the second highest monthly sales in 2014.
It seems that some savvy individual investors might have taken some chips off the equity table or have converted some of their cash to gold in anticipation of a potential currency war.
About the Author: Edmund C. Moy
Edmund C. Moy
is the Chief Strategist of Fortress Gold Group
and was the 38th Director of the United States Mint (2006-2011). He can be followed on Twitter @EdmundCMoy.
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