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Gold Wins in a Currency War

24 May

Gold Wins in a Currency War

Gold Market Discussion

There are two takeaways from today’s’ commentary.  Let me share them with your right up front:

  • Takeaway #1: 
    President Trump wants to have a currency war with China, and ultimately with the rest of the world.
  • Takeaway #2: 
    The big winner in currency wars is gold.

In addition to continual calls from the administration for all the elements of a currency war, specifically for the Federal Reserve to lower rates further, for more Quantitative Easing (money printing), and for tariff regimes, the President recently tweeted, 

“China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing. If the Federal Reserve ever did a ‘match,’ it would be game over, we win! In any event, China wants a deal!”

In response to the taunt, a Chinese government newspaper, the Global Times, reports that China is preparing for a currency war, with steps being taken that will position it to strike back.

In our May 15 post, Trump Calls for Currency War with China!, we explained elements of currency wars:

A currency war occurs when nations deliberately depreciate the value of their currencies in order to stimulate their economies.  When trading partners impose tariffs on a country’s incoming goods, the exporting nation will often depreciate or devalue its currency so that its goods become cheaper to foreign buyers.  In this way it hopes to offset the additional cost imposed on its goods by the tariffs or taxes imposed on them.

It is a deranged strategy.  Countries devalue their currencies by manipulating interest rates lower and printing money – or to use the euphemisms of the day, by “quantitative easing.”

While it can make its manufactured goods cheaper for foreign buyers with such machinations, it makes everything its own citizens buy from foreign producers more expensive.  So, if a country like China drives the yuan down, the Chinese pay more for raw materials, gasoline, food, and anything else that comes from abroad.

When China devalues its currency, it makes the Chinese people poorer.

When America devalues its currency, it makes the American people poorer.  

A country the devalues its currency is saying that it wants its people to get less for their money.

Who wins currency wars?  People who own gold are the big winners.

In his book Currency Wars, author Jim Rickards identifies three major currency wars in the last 100 years.  

The first, from 1920 – 1936 saw the complete collapse of some currencies, while President Roosevelt declared a bank holiday and steeply depreciated the dollar.

Gold holders were the big winners as gold skyrocketed from the gold standard price of $20.67 an ounce to $35 an ounce.

Gold appreciated 69 percent.  

The second currency war, Rickards dates from 1967 – 1987.  There can be some disagreement about the dates, but there is no disagreement about the dollar’s loss of purchasing power during the period.  As the currency war opened, gold was still officially priced at $35 dollars an ounce, but in the free market none was available at that price.  It was the period that saw the silver in US coinage replaced with cheap base metals, although the government went to a great deal of trouble to make the new coinage appear to still be made of silver.  Most of the action took place during the stagflation decade of the 1970s, and by the beginning of the 1980s gold has raced to $850 an ounce.

Rickards identifies the third currency war as having begun in 2010.  It continues today. Given the risk of the collapse of the global monetary system, Rickards suggests that Currency War III may be the last currency war.  

Currency War III includes the so-called Great Recession, Quantitative Easing, and an explosion of unpayable government debt.  Even with events of that magnitude, it is fair to say that until now, Currency War III has been a low-grade affair.  Even so, it saw gold roar up to $1,900 per ounce in 2011.  

But now the currency war is getting going in earnest as threats and counter-threats of rising intensity fly back and forth across the oceans. 

If Rickards is right that this could be the last currency war, then there is little point in attempting to forecast just how high the price of gold will go in terms of a dollar that itself will be dethroned as the world’s reserve currency.

In the final analysis, wealth will be measured not in terms of such irredeemable paper currencies, but in terms of how many ounces of gold one owns.

In currency wars, the winners are people who own gold.

jim-sign

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