Gold to gain as global currency war intensifies
Wed Sep 11 2019
The US treasury has labelled China as “currency manipulator”. In fact,
the Middle Kingdom, had long been manipulating its currency upward, above
market valuation, and was sanctioned by the United States only when it began to
let market forces push its currency down a little. It didn’t designate China in
the 2005-08 period when a case to do so existed, as Beijing was running a
current account surplus of 10% of GDP and intervening heavily.
Growing currency war
Global growth is slowing down and the trade war uncertainty is
worsening growth prospects further. Faced with insufficient growth, politicians
see a weaker currency as a direct shot at improving their export competitive
status. Currency war is just the logical extension as worried politicians
tinker their exchange rates as a way to tackle faltering economies.
The race to the bottom between the fiat currencies will continue as
each sovereign state believes that a weaker currency will boost exports and
ultimately will get them out of this mess. The fact that each round of currency
devaluation negates the previous one would appear to have gone unnoticed by
those involved.
Why gold will gain
The main influencing factor in the gold market today is the massive
and unrealistic heap of sovereign debt throughout the Western financial system
coupled with a paper currency that is positioned as the reserve currency of the
world, which however can be issued and abused by a single government. These
high levels of debt, combined with slow economic growth compel central banks
around the world to ‘print’ more dollars and other currencies (in order to pay
the bills), stimulate the economy, engage in national currency devaluation, and
inflate away the debt burden with an intentional plan of currency devaluation.
Long-term trends in gold prices are driven by changes in the overall
level of confidence in the monetary system and the economy. Therefore, to
analyse gold over the long term, it needs to be seen as a monetary asset rather
than a commodity. Given the current economic backdrop, where governments are
struggling with problems like rising deficits and unsustainable debts, it is
indeed logical for gold prices to increase in value. With policy makers
continuously debasing currencies, gold will be viewed as a preferred
investment, lending some solace to the chaos.
The rationale for owning gold assets remains simple: global
deterioration of sovereign credit and a growing need to debase currencies in
order to meet future obligations, whether it’s in the US, Europe or Japan. The
policy of socialising risk with monetary and fiscal policy has destroyed the
balance sheets of the Western world. We are in a phase of experimental central
banking, which I believe is going to end badly due to the dislocations of
capital it has caused through prolonged periods of negative rates.
The clash for supremacy will overtime intensify strains between the US
and China, reinforce the trade war, unleash global currency tensions and add to
financial market volatility. This may increase global downside risks and hurt
growth.
Make a strategic allocation to gold because it is the counterweight to
paper money which is continuing to lose credibility as a store of value. Review
your allocation to gold to make sure it remains adequate enough to be able to
serve as an effective portfolio diversification tool; an allocation of 10-20 %
of your portfolio. That way the precious metal can act as a shock absorber to
help protect from any unexpected bumps in the financial system.
Source: https://www.financialexpress.com/