Gold’s safe haven credentials have been reaffirmed in recent days as the dollar’s safe haven appeal is increasingly being questioned (see News and Commentary section of homepage). The scale and speed of the decline of the dollar (and to a lesser extent, sterling) in recent days is unprecedented.
The dollar has fallen against all major currencies but especially the euro. It has gone from 1.26 to over 1.47 in less than two weeks or a decline of more than 16%. The volatility seen this morning is incredible with the dollar collapsing from an inter day high of 1.4344 to as low as 1.4719. This is a fall of 2.6% in less than 3 hours.
Gold has rallied for 8 days in a row now and is up by more than 17% (in dollar terms) in less than two weeks on increasing risk aversion and a flight to the quality of hard finite assets.
Sterling has also fallen precipitously leading to fears of a currency crisis. The Bank of England resisted cutting interest rates by more than 1 per cent earlier this month amid fears that the economy and sterling would collapse. The bank revealed yesterday that its Monetary Policy Committee had “considered cutting rates further”, but it feared that “there was a risk that going further could cause an excessive fall in the exchange rate” causing inflation in the long term.
Ben Read, managing economist at Centre for Economics and Business Research, told the Telegraph: “No doubt the MPC will cut rates further when they meet in January, but it is likely more creative measures will be required by both the Treasury and the Bank of England. “However with the credibility of UK fiscal and monetary policy now under serious scrutiny across the international markets, each policy option comes with potentially serious consequences for the credit worthiness of UK plc.”
The creditworthiness of US plc is also increasingly coming into question with the dawning realisation that US government debt is now the greatest bubble of them all.
Global currency debasement and competitive currency devaluations are taking place across the world as nations attempt to make themselves more competitive by devaluing their currencies. This is done to help make exports competitive and thus keep manufacturing jobs.
Gold is a finite currency will be the default currency of choice and a monetary safety valve where large sums of capital will flow – thus resulting in sharply higher prices.
Competitive currency devaluations on an international scale are a recipe for wealth destruction on a massive scale. Devaluation is a short term panacea which fails to address underlying uncompetitive challenges facing economies. Countries that devalue their currencies tend not to do well over the long term as seen in many emerging markets and South American economies in modern history.
Countries that have strong currencies in modern history (such as Germany and Switzerland) tend to move up the value chain in terms of exports and prosper in the long term. A sound currency is a prerequisite for a sound economy and alas the UK, US (after years of profligacy) and many other nations face major challenges on both fronts.
