Gold bulls watching currency battles

Currency guru Axel Merk warns that the act of “devaluing a currency may lead to escalating international political strains, global criticism and intensification of protectionist pressures” When one currency is artificially weak, other countries may be put at a disadvantage, as other countries’ goods and services may be less competitive in the global market. Trade wars are good for no one: they create inefficiencies and slow down global growth. In a period of lackluster global growth, this is the last thing we need.”

Mr. Merk adds that recent references of a “race to the bottom” and worldwide “currency wars” should not be taken lightly – given that the global economic recovery remains on unsteady ground, the implications of another slowdown in growth could be disastrous.” Such fears may have contributed to the sense of urgency in calling for cooperation rather than going-at-it-alone contained in Mr. Geithner’s (and Mr. Igarashi’s) remarks. For a change, the G-7 might underscore that they are about to back-track to the Plaza Accord environment – even as market perceptions point in the opposite direction.

More dissection of the current state of hot-and-bothered affairs in the gold market came from Seeking Alpha contributor Jason Schwarz. Mr. Schwarz first questioned a market in which a super-side spectrum of confused, contradictory, and illogical explanations are being offered to account for the recent (sixty day) gains in the yellow metal. Then, Mr. Schwarz elaborates further and correctly identifies the four groups responsible for what he (among others) labels as a golden bubble. Note the three-out-of-four dominance of the ‘usual suspects’ as follows:

  • Group 1 (November 2007- April 2009): Hedge funds who were worried that the global financial system would crumble as a result of the mark-to-market banking regulatory requirements.
  • Group 2 (October 2009-April 2010): Hedge funds who were worried that unprecedented stimulus would result in hyperinflation as global economies recovered.
  • Group 3 (May 2010-July 2010): Hedge funds who were worried that the euro zone would collapse thereby causing currency chaos.
  • Group 4 (August 2010- ???): Individual investors who are now buying gold for the first time because they want in on the action.

Mr. Schwarz concludes with the observation that “gold at $1400 is eerily similar to oil at $140. Remember all the credible firms extrapolating the speculative action into $200 oil forecasts? Those same bubble builders are now calling for $2000 gold.” And that inside of the twelve months in which his reversion to the mean scenario (involving $60 GLD) will materialize.

September retail sales were better than expected, German industrial production rises more than anticipated, the Dow flirts with 11K (!), Bank of England puts additional stimulus ‘on hold’ while jobless claims drop 11,000 on the latest reporting week. Should these metrics matter? Not if the arm-wrestling manifest over previous days (the media has actually backed off of or forgot to call any more ‘records’) reignites after a brief dip. Place your bets.

PS - Here is one little bet that might pay off over the next year: currency wars do not ignite. Premise: who needs/wants a fresh crisis?

Jon Nadler is a Senior Analyst at Kitoc Metals Inc, North America

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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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