Despite IMF assertions to the opposite, the currency war is real and ongoing. Last month, Christine Lagarde, head of the International Monetary Fund, claimed that there’s no such thing as a currency war. She trivialized concerns over competitive currency devaluation by saying, “we’ve heard currency worries, not currency wars.”
“We’ve not seen confrontation, but deliberation, dialogue, discussions,” she said.
Apparently, Lagarde’s definition of “currency war” entails that as long as we’re all playing nice, we’re not embroiled in one. According to her, we’re not even in a currency kerfuffle. The world’s central banks are just a bunch of old friends talking shop and agreeing on how to politely manipulate exchange rates and deplete the value of their currencies.
Shots Fired
Assuming Lagarde is right about the currency war (which she isn’t), the peace was shattered and shots finally fired, as China chided neighboring Japan for its ever expanding monetary policies. If it takes a quarrel to make a currency war, here it is. So even by Lagarde’s insouciant standards, we are now in a currency war.
China has so far been more reticent than other emerging economies about the loose monetary policies (i.e., currency war tactics) of developed countries. Until recently, it has been content to exponentially step up its gold buying, putting the pieces in place to hopefully boost the Yuan’s status to that of global currency reserve someday. But on Friday, Chen Deming, China’s Commerce Minister, finally voiced concerns over the currency devaluation trend that is sweeping through the world’s most powerful central banks like a teen fad.
“I am worried about inflation, about competitive currency depreciation and about the negative spillover effects of excessive issuance of the main currencies,” Chen said.
Earlier in the week, president of China’s sovereign-wealth fund, Gao Xiqing, spoke more bluntly about Japan’s fiscal exploits – the Yen recorded its lowest value against the US dollar in three years last week – and how they affect China and other emerging market economies.
“Treating the neighbors as your garbage bin and starting a currency war would not only be dangerous for others, but eventually be bad for yourself,” he said in an interview with the Wall Street Journal. “I would hope that [Japan] doesn’t do that as a responsible government.”
But even Gao must know how naïve it is to beseech a government to be responsible and expect them to heed the plea. His statement will more than likely fall on deaf ears, as Japan has 2 percent inflation in its sights and just voted to keep its open-ended asset purchases unchanged.
A Bit of Proof
Of course, it could all be a matter of semantics. Those who deny that a currency war is being waged have the weight of the word “war” at their disposal. War means bombs, bullets, blood. We’re not seeing any of that, ergo, we’re not fighting currency wars.
Proof of currency wars being waged can be found in the amount that central banks now hold in their reserves. In 2000, global currency reserves totaled a mere $1.9 trillion dollars, but that number burgeoned to $11.2 trillion by the latter half of 2012. The largest increase was in the five years since 2007, during which, the total global currency reserves more than doubled. This escalation is a direct result of central banks buying up assets indefinitely and printing money like Parker Brothers releasing the next edition of Monopoly.
Now, disregarding whether or not currency wars are good for economies, one thing is clear: that since the amount of currency held in global reserves has increased, the price of gold has increased alongside it, almost perfectly mirroring its changes every step of the way. In fact, over the last 12 years, the two have had a 98% positive correlation. As currency reserves shot skyward into the trillions, gold shot up to reach a peak of over $1,900 an ounce in 2011.
From this data, we can deduce two hard facts that are beneficial for the gold investor to know:
- Currency wars are not merely fictions that emerging-market economies dream up to accuse the developed world of mistreatment, they are real; and
- The goal of currency wars, i.e., weaker currencies, is good for gold.
How Far Will They Go?
So the question for those looking to buy gold to profit and protect wealth becomes, Will the currency wars continue? Will global currency reserves continue to swell?
These questions can be answered with a question: Have the central banks of developed countries showed any signs of stopping the actions that caused the reserves to swell so immensely in the first place?
And the answer to that question is, frankly, No.
Some have recently pointed to the minutes of the January meeting of the Federal Open Market Committee as evidence that we will see an end to QEternity in 2013. But to do so is to neglect the actual result of that meeting, which was an 11-1 vote for continuing quantitative easing. Yes, the committee members may have discussed the fact that they should stop printing money with reckless abandon and handing it right over to the banks (and then paying interest on those funds); however, when it came time to act, to make a decision on what would happen in the real world, they decided to continue easing, which means they will continue to wage currency war.
As Europe deals with failing economies, austerity and a debt crisis that is still not over, we can expect to see the Euro see more devaluation in the future.
And, as mentioned above, Japan is still going full speed ahead.
So yes, it’s a pretty safe bet that the currency wars – and gold’s epic bull run – are not over yet. As the wars rage on, global currency reserves are only going to grow, and there’s no reason to believe that gold won’t still have that 98% positive correlation with them, either.
Gold’s bull run isn’t dead. It’s taking a short breather and will climb back up soon. The savvy gold investor will view this slump as a blessing, as it presents the perfect buying opportunity. Investing in gold bullion now will pay off when the price swings northward again. As world currencies lose value, it only makes sense to anchor your finances with something tangible that will be of worth when fiat money is not. That asset is gold, and now is the time to buy in.
Recommended for you: Gold IRA Rollover Guide and Silver Investments.
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