Abenomics Brings Currency Wars to G7 Talks

Today’s AM fix was USD 1,449.25, EUR 1,114.12 and GBP 941.62 per ounce.  
Yesterday’s AM fix was USD 1,469.50, EUR 1,118.68 and GBP 944.59 per ounce. 


Cross Currency Table – (Bloomberg)

Gold fell $16.40 or 1.11% yesterday to $1,456.20/oz and silver finished down 0.92%.

As the global economic slump continues central bankers, such as Mario Draghi, and politicians have vowed “to do whatever it takes” to get economies back on track. Such policies while having near term benefits are considered extremely risky in the longer run by many commentators as they could beckon runaway inflation or stagflation, with ruinous results.

Shinzo Abe unleashed his plan with the blessing of the Bank of Japan to begin aggressive government bond purchases. This has led to a massive growth of 60% on the Nikkei and is deflating the yen and boosting their exports.

Kyle Bass of Hayman Capital, a strong gold bullion supporter, previously described the country’s combination of; the highest Debt-to-GDP ratio, its large trade deficit, low FDI and a declining population as a "vicious cocktail".


Gold in Japanese Yen, 5 Year – (Bloomberg)

Abenomics in simple terms allows the nation’s Prime Minister to push its supportive Central Bank to increase the money supply by ramping up government printing presses, resulting in the yen dollar to break the ¥100 barrier.

Not un-expectantly this, aggressive and potentially calamitous, policy has caused other countries like South Korea & New Zealand to cut interest rates, noting the damaging effects the deflated yen has on its exporters.  

This environment continues to be bullish for precious metals. JP Morgan’s analyst said on May 8th, “Continued central-bank stimulus from the U.S. to Japan to Europe will support gold, with prices rebounding to $1,700 by the end of this year.”


Gold in USD, 5 Year – (Bloomberg)

Bloomberg surveyed analysts asking if they expect prices to rise next week, 10 were bearish and 5 were neutral.  With the recent drop in gold backed ETF’s traders are nervous as to whether the physical demand from bullion coins and jewellery will sustain the rally in prices.

Sentiment in the yellow metal has waned as hope increases that the U.S. economy is recovering and inflation remains in check.  

Bloomberg estimates an average of 38 analysts feel gold will finish the year at $1,550, 7.5% less than at the end of 2012. Goldman Sachs reported on April 23 bullion may slide to $1,390 in 12 months, and Deutsche Bank AG predicts a fall to as low as $1,050. Societe Generale SA, Barclays Plc, Credit Suisse Group AG and Morgan Stanley are also among those forecasting lower prices.

As global economies, such as Japan, start to experiment with unilaterally focused policies, it will become an enormous challenge to contain the underling risks building in the “system”.

Gold, sometimes referred to as a barbaric relic, is considered a safe haven asset.

Gold is largely immune from the actions of Central Bankers.  A modest allocation of gold is essential in a globally diversified economy. The old Wall Street adage ……put 10% of your money in gold, and hopes it does not work… has never been more apt.

Mark OByrne

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