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Escalating Currency War Keeps Gold Underpinnedby Peter A. Grant
Jan 18, AM 
The BoJ continues to sabre rattle, with threats to scrap the 0.1% rate floor and unlimited asset purchases. The central bank is widely expected to ease further next week, but questions remain as to how aggressive that move might be, given the heightened pressure being exerted by PM Abe.Abe has declared war on deflation. He wants to push inflation up to 2%, which is pretty much going to require the BoJ to significantly expand its asset purchases. Stated another way: As a means to reinvigorate the moribund economy, the goal is to drive the yen lower, making Japanese goods and services cheaper. On these expectations, USD-JPY traded above 90.00 this week, levels last seen in June 2010. EUR-JPY pushed above 120.00 before moderating on Friday. And this is before the BoJ has even spooled up the printing press. Koichi Hamada, an adviser to PM Abe, suggested that a drop in the yen to 95 or 100 was not a problem for Japan. Perhaps not for Japan, but this beggar thy neighbor competitive currency devaluation may well pose problems for other countries. The EU's Jean-Claude Juncker has already expressed concerns about the strength of the euro. "The euro foreign-exchange rate is dangerously high,” said Junker. With the EU in recession as well, one has to wonder what the ECB might do to keep European export markets competitive. The ECB held rates steady last week, but they have room to ease further. And what of the Fed? Our central bank is maintaining its super-accommodative policy stance, but could always escalate QE further. Certainly the current environment makes the concerns surrounding the perceived new found hawkishness among FOMC members that surfaced following the release of the December minutes, seem unfounded. I think the recent rebound in gold is largely attributable to the unwinding of these tightening expectations. Philadelphia Fed President Charles Plosser has expressed concern about the escalating currency wars. Plosser said, "We don't want to get ourselves in a world where you have currency wars. Beggar-thy-neighbor polocies ... would not be healthy." Alexei Ulyukayev, First Deputy Chairman of Russia's central bank, has also warned that the world is on the brink of a currency war. “Japan is weakening the yen and other countries may follow,” said Ulyukayev. I've got news for Messrs. Plosser and Ulyukayev: We're over the brink and the currency war is underway. Even little ol' Costa Rica and Thailand have joined the fight. According to a Bloomberg article on Thursday: "Costa Rica plans to reduce interest rates to discourage capital inflows after the colon reached the strongest in almost five years. Thailand’s baht retreated from a 17-month high today after Finance Minister Kittiratt Na-Ranong said the exchange rate is “not at a good level” and exporters will face difficulties should it strengthen further." With the major fiat currencies of the world — and many of the minor ones as well — purposely being debased, countries with foreign exchange exposure (and that's all of them) are not surprisingly looking for alternatives. In this environment a hard currency, recognized internationally as a store of value should fare quite well. I'm talking of course about gold. NEWSLETTER SIGN-UP Opinions expressed in commentary on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.
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