The Currency War & Gold

Posted | 06/03/2015 / Views | 2700
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Last week we showed you just how effective gold is at protecting your wealth with a falling currency.  Whilst the RBA surprised this week by not lowering our rate again, the AUD stays at the 78ish level for longer.  But most now fully expect next month will see a rate drop and so too the AUD, especially in light of yesterday’s ordinary GDP print.  The RBA remain trapped between not popping the property bubble and the need for a lower dollar.  They are going to try lending restrictions to tackle the property bubble so a lower dollar seems inevitable.  Interestingly this week Bill Gross, the infamous ex head of one of the world’s largest ($2t) money managers had this to say (courtesy of Bloomberg):

“Bill Gross said a global race to devalue currencies in an “undeclared” war risks slowing growth instead of stimulating it.

Central bank policies have pushed interest rates below zero in Europe, and countries including China and Japan appear to be devaluing their currencies…..  While such moves make debt burdens more tolerable and exports cheaper, they are bound to hurt the global economy as a whole, he wrote.

“Common sense would argue the global economy cannot devalue against itself,” Gross wrote. “Either the strong dollar weakens the world’s current growth locomotive (the U.S.) or else their near in unison devaluation effort fails to lead to the desired results.”

More importantly, Gross wrote, low to negative interest rates hamper the functioning of capital markets and prompt investors to take on higher risk to boost returns, making the financial system more vulnerable.”

So in effect gold is an each way bet.  If currencies (the AUD included) continue to be devalued (by lowering rates or printing money) you win.  If this unprecedented “currency war” ends in a financial collapse, you win.  That you can buy in now at historically low prices means you also win the ‘buy low, sell high’ game.