Gold News

Gold: The Last Man Standing in the Currency Horse Race

The world's central banks are all competing to have the weakest currency possible...

THE WORLD'S currency markets right now are like a horse race – except a horse race nobody wants to win, writes Dan Denning, editor of the Daily Reckoning Australia.

The closer a currency gets to the lead (world's strongest) the more its jockey (the central bank) does to slow it down. Some of the horses have been run into the ground. And as we come down the home stretch of the competitive currency devaluation sweepstakes, it wouldn't surprise if one of the jockeys took out a shotgun and blasted his mount away.

Case in point is yesterday's intervention by Japanese Finance Minister, Jun Azumi. The Yen has indirectly benefitted from the weak Euro and chronically sick US Dollar. But "benefitted" is the wrong word in our bizzaro currency universe. In this universe, strength is weakness and weakness is strength.

A strong Yen makes Japanese exports more expensive. Japan's whole trade and economic strategy is based on strong exports. It wants to make things everyone else buys. The stronger the Yen, the weaker the strategy.

But because the Yen is NOT the Dollar or the Euro, and because it has been favored by speculators, it is relatively stronger than the other two reserve currencies. And because interest rates in Japan are terminally low, speculators love to borrow in Japan and invest in riskier, higher-yielding assets abroad.

That's what made yesterday's Yen intervention in the market so puzzling. The Gold Price in Yen instantly spiked by three per cent. But then all of the things that should have happened next did not happen. Risk assets like the Aussise Dollar, copper, and Aussie stocks did not rally, they sold off. What gives? 

Why has the Yen weakened against the US Dollar and gold, but failed to spark a rally in risk assets? We reckon it's for this reason: traders realize the Yen is the last fiat emperor standing. The fact that the Japanese are now ready to attack their own currency is not bullish for other assets. It's bearish for everything. It represents a profound escalation in the world's currency wars, with no neutral assets in which to hide (except gold).

Finance Minister Azumi announced the intervention during market trading. He told reporters...

I've repeatedly said that we'll take bold action against speculative moves in the market. But unfortunately, we've continued to see one-side speculative moves that don't reflect the economic fundamentals of our economy. That's why I ordered intervention at 10:25 a.m. local time...I'll continue to intervene until I am satisfied.

"Until I am satisfied?" What does that mean? And have you ever heard a finance minister say that a strong currency doesn't "reflect the fundamentals of our economy?" These are unusual times.

Normally we'd back the speculators over the Finance Minister. But in a fiat money world, a central bank can flood the markets with infinite amounts of new money to suppress a currency's appreciation. Are the Japanese really willing to do this? And does it really matter?

Aren't traders and investors now realizing that central banks are hell bent on inflation and currency devaluation? This is a game no one can win. But the moves certainly are confusing.

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Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles
 

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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