Experts: Currency War May Prompt Gold to Rise

Monday, 11 Feb 2013 10:36 AM
By Michael Kling

A currency war could prompt gold prices to rise later this year, analysts predict.

Central banks around the world are pushing down the value of their currencies to increase exports and improve economies at home. The strategy might spark inflation and raise investors’ concerns, causing a surge of investors into gold.

Most recently, the Japanese central bank adopted that strategy, pushing down the yen’s value after doubling its inflation target to 2 percent and making an open-ended commitment to keep purchasing assets.

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A race for competitive devaluation could heat up if the eurozone joins the effort. France has said it will bring up the euro’s value at the upcoming meetings of the Europgroup finance ministers as well as the G20 finance ministers.

“We think a currency war will be the biggest story of 2013 when we look back on the year,” Patrick Armstrong, managing partner at Armstrong Investment, told CNBC.

“The G20 meeting I think is going to focus on what people are doing with their currencies, trying to gain an edge with currency manipulation. Whenever that’s the backdrop, gold has a place in the portfolio.”

Michael Widmer, metals strategist at BofA Merrill Lynch Global Research, agreed that a currency war this year would help gold rise, according to CNBC. Gold, he said, has a downside in the short run as the global economy improves but a better outlook if central banks continue to devalue their currencies.

Gold may fall $100 in the short term, but might rise $250 to $300 in the second half of the year, Widmer predicted, saying markets have not yet priced in a continuing currency war.

“If the yen remains relatively weak, I think other emerging markets, or Asian central banks, should start to become more proactive in managing their exchange rates,” he told CNBC.

“If that happens their FX reserves should start to increase, and then they should start to diversify their U.S. dollar holdings into gold holdings again, which has happened during the past few years,” Widmer said.

“The more central banks try and manipulate the value of paper money the more investors will grow disillusioned with it,” wrote MarketWatch columnist Matthew Lynn.

“There is only one quasi-currency that nobody tries to devalue — only because they can’t — and that is gold. If central banks engage in a round of competitive devaluations, then the value of any of paper currency measured in gold will only go up.”

Source: Money News

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