Gold's bullish case remains despite G-20

Lots of wiggle room

The G-7 statement does suggest some effort at discipline in the ranks or at least an openness to coordination and pre-emptive discussion:

“We, the G-7 Ministers and Governors, reaffirm our long-standing commitment to market-determined exchange rates and to consult closely in regard to actions in foreign exchange markets.”

But in an excellent display of semantics:

“We reaffirm that our fiscal and monetary policies have been and will remain oriented toward meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates.”

So when using QE just don't mention that it is also designed to depress the currency to boost exports as the Japanese did recently. Leave it to the markets to figure that one out. Also, the statement is merely a reaffirmation of commitments made several years back. But currency wars have been ongoing largely because the U.S. Federal Reserve, through its monetary policy, has left other nations with the choice of an appreciating currency vs. the U.S. dollar making their exports less competitive or importing inflation if they try to maintain exchange rates.

The U.K. has been quietly pursuing a similar approach and Japan has recently jumped on the bandwagon and promises some monetary shock and awe of its own. No doubt there will be statements from the G-20 this week about avoiding currency wars, but it is unlikely that the summit will call timeout on QE by some G-7 members.

The justification for doing QE and fiscal policy adjustments is usually attributed to domestic objectives such as stimulating the economy. And that particular objective is still top priority. Fears over currency wars could see the major central banks decide to do QE in a coordinated fashion, say in response to a global stock market crash for example.

If the main central banks all went together, there's less likely to be big swings in exchange rates between the major currency pairs and they could be argued to be acting in the spirit of their commitments. The casualties will be among those not party to the concerted intervention.

XAU/JPY chart – bulls pause for breath

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