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Currency wars should provide support for precious metals

By Sober Look

As nations see Japan’s success in weakening the yen (see discussion), some begin to take notice. Emerging markets nations often attempted to devalue their currencies in the past in order to improve competitiveness. But these days developed economies are doing it as well. This morning the Russians called these policies “currency wars”, which is a good way to describe the latest developments. And such policies are not limited to Japan.

Bloomberg: – The alert from the country that chairs the Group of 20 came as Luxembourg Prime Minister Jean-Claude Juncker complained of a “dangerously high” euro and officials in Norway and Sweden expressed exchange-rate concern.

The push for weaker currencies is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of room. The risk is as each country tries to boost exports, it hurts the competitiveness of other economies and provokes retaliation.

Yesterday “will go down as the first day European policy makers fired a shot in the 2013 currency war,” said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London.

In an environment such as this it is somewhat surprising to see gold treading water.

Gold (spot price, source: Barchart.com)

The key concern on the part of precious metals investors is the risk of rising US dollar – as Europe and Japan focus on pushing their currencies lower. Stronger dollar tends to put downward pressure on commodity prices.

As discussed earlier (see post), the Fed’s activities in 2012 did not materially increase US bank reserves or the monetary base. 2013 however will be a different story, as the dovish Fed keeps buying assets at an accelerated pace (see discussion). That’s why in spite of this latest news from Europe on “currency wars”, the dollar remains subdued.

Dollar index (DXY, source: MarketWatch)

At least in the near term, precious metals and some other commodities should benefit from this global policy of “currency wars”, which include a large contribution by the Fed.

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Sober Look is a no-hype financial markets/macro blog that typically relies on data analysis, primary sources, and original materials. We keep it concise, to the point, with no self-promoting nonsense, and no long-winded opinions. If you are looking for Armageddon predictions or conspiracy theories, you will be thoroughly disappointed. Topics include financial markets, banking, asset management, risk management, derivatives, global economy, policy, and regulation, with the emphasis on finance education. Follow him on his blog or twitter.