Currency Wars: Euro descending, but what of gold?

Tuesday, Nov 29 2011 by
Currency Wars Euro descending but what of gold

Jim Rickards’ new book, ‘Currency Wars’, has been getting plenty of attention recently as its launch has seen it rocket up the best sellers lists, and not just in the financial and economic world. Jim has also had an interesting spat with Nouriel Roubini recently on Twitter, which still seems to be rumbling on. The title of Jim’s book seems to be rather prescient at this time as we look across the Eurozone and watch the markets generally. Jim advises that we are in the middle of the third great currency war, we find his arguments compelling, and the release of his book is perhaps timely.

Market attention is still largely focused on the Euro zone and a currency at considerable risk. Pressure is building on a wider range of constituent parts of the European currency union as notably Germany finds a debt auction a little more than half subscribed. Germany is no island of fiscal solidarity as Kyle Bass points out in an excellent interview with the BBC’s ‘Hard Talk’ (part 1 + part 2) (many will have no doubt seen this after ZeroHedge helped kick it viral[ish]). Bass cites Germany’s 81% debt to GDP ratio and the fact that, as Professor Peter Bernholz finds in his book ‘Monetary Regimes and Inflation’, Germany has defaulted twice in the last 100 years. We would join Bass and others in believing that the German balance sheet is not strong enough to backstop the Eurozone’s problems. We also think it less than likely that Germany will opt to act as such a backstop anyway.

Surely Angela Merkel’s continued refusal to even table a Eurobond initiative is evidence of this. Even if Merkel were willing to pursue a Eurobond, this solution could be mal-adaptive anyway. The European currency union’s structure allowed certain debt imbalances to build up in its prior guise, and such a collective pooling fiscal sovereignty and liability required to issue a Eurobond would once again open an agency issue. Andrew Lillico of Europe Economics refers us to previous research by Gneezy et al, published a few years ago in the Economic Journal, which found going to dinner with friends on the basis that the bill would be split equally (as opposed to paying for what one consumes) lead to an average bill that is 36% higher. We…

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18 Comments on this Article show/hide all

macroeconomix 29th Nov '11 1 of 18

Wonderful to get an Austrian perspective on here .. Well done Will!

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Steven Dotsch 29th Nov '11 2 of 18

There are loads of 'potentially' undervalued gold miners out there. Unfortunately, from our perspective as Dividend Income Investors, hardly any of them feature as dividend payers with a long term track record of paying dividends, or, indeed, increasing their dividends annually.

More about miners' prospects in general , see: 

"For the near term I am concerned about the general softening of prices when we continue to see cost escalation and strong currencies in Australia and Canada,"

Steven Dotsch - Dividend Income

Book: Guide to Dividend Investing
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Steven Dotsch 29th Nov '11 3 of 18

Gold miners' newfound attention to dividends doesn't necessarily mean their shares are now appropriate core holdings for income-oriented investors; see:

Book: Guide to Dividend Investing
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Steven Dotsch 30th Nov '11 4 of 18

Gold Producers Poised Like ‘Coiled Spring’ to Rally: Commodities, at:

"Gold mining stocks are trading at their cheapest level in at least nine years even as the industry’s profits are estimated to almost double this year and bullion trades close to its historic high."

Book: Guide to Dividend Investing
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emptyend 30th Nov '11 5 of 18

Coordinated central bank easing of swap rates suggests that we will be risk-on for a while.....won't do much for gold, bonds or other perceived hedges against Armageddon.

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macroeconomix 30th Nov '11 6 of 18

In reply to emptyend, post #5

Your timing is impeccable EE !

BTW bonds are not a good hedge against "Armageddon" ;)

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Fangorn 30th Nov '11 7 of 18

What on earth happened to gold this afternoon. What a spike - just back from gardening so catching up.

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ohisay 30th Nov '11 8 of 18

In reply to Fangorn, post #7

14.05 Turning back to this suprise coordinated move by the world's biggest central banks to cut the cost of borrowing in dollars, Jeremy Cook, chief economist at foreign exchange company World First gives his explanation for the move:

 Cutting swap costs is the equivalent of interest rate cuts. These banks are now basically providing unlimited US dollars to banks with which to fund themselves. The banks will be hoping this is a turning point in the crisis.

We do not know what caused this decision, we may never know, but the smart money is on the fact that yields on one-year German debt went negative this morning (paying Germany to lend it money).

This may have been a signal that the money markets were a short shove away from complete collapse

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emptyend 30th Nov '11 9 of 18

In reply to macroeconomix, post #6

RE timing I merely watch Bloomberg TV -  certainly it has gone a fair way with risk-on trades since that news....though it is rather surpriing to me that gold has gone notably higher. I never said that bonds were a "good hedge" - just that they were being held as a favoured asset in case of armageddon. One of the "less bad" assets perhaps?

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Fangorn 30th Nov '11 10 of 18

Thanks Ohisay. Interesting coordinated move. Doubt it will suffice though but a welcome bounce in markets. Wish it would encourage some M&A activity. :)

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macroeconomix 30th Nov '11 11 of 18

In reply to emptyend, post #9

One of the "less bad" assets perhaps?
Not even close.. if things really got that bad who on earth would want to own government debt let alone expect to trade it with someone for something useful?

Nope, holding onto real assets in times of crisis is what its all about. i.e. "stuff" and the productive property that produces "stuff".

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emptyend 30th Nov '11 12 of 18

In reply to macroeconomix, post #11

One of the "less bad" assets perhaps?
Not even close.. if things really got that bad who on earth would want to own government debt let alone expect to trade it with someone for something useful?

Well I've owned a slug of it over the last 4 years as yields have collapsed from 6% to 2%...and haven't done too badly whilst the FTSE100 has lost 1,200 points..........

Don't be too purist....

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macroeconomix 30th Nov '11 13 of 18

In reply to emptyend, post #12

;) Congrats! Gold hasn't done too bad either.

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Fangorn 30th Nov '11 14 of 18

I suspect yields have fallen about as low as they are going to UST side. Next more in Interest rates must surely be up, at some point as investors demand a higher risk premia as their burgeoning debt issue comes to the fore (once of course the Eurozone has imploded, along with the UK)

The markets however aren't focusing on the US just yet but when they do I expect the fallout to be even more significant than the hapless Eurozone induced ones we have been seeing recently - and it will make the Lehman's debacle look like a walk in the park.

All in my opinion of course,and yes, I am very bearish on any solution being found to the debt issues the western world faces.

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nigelpm 30th Nov '11 15 of 18

In reply to Fangorn, post #10

Thanks Ohisay. Interesting coordinated move. Doubt it will suffice though but a welcome bounce in markets. Wish it would encourage some M&A activity. :)

Had this debate with someone on TMF.

Basically M&A is picking up dramatically of late.

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Fangorn 1st Dec '11 17 of 18

In reply to nigelpm, post #15

Oooh really. Grateful if you could link the thread so | can peruse.

Given many companies have significant cash on their balance sheets am hoping that this leads to M&A in several sectors - Oil, Mining and Finance(Insurers), specifically in those companies where I am invested :)

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Steven Dotsch 2nd Dec '11 18 of 18

Earlier this week, in a swift move, China, the United States and Europe are making moves to add liquidity to the markets. Stockmarkets loved it! These actions, some of which were meant to demonstrate that there won’t be a liquidity crisis like 2008 as the European debt crisis comes to a head, will in fact be very inflationary.

All this should be good for gold, as the creation of liquidity in 2009 and 2010 was bearish for the U.S. dollar. As gold usually moves inversely to the U.S. dollar, the latest liquidity flood should be positive for gold bullion prices going forward.

These actions come at a time when gold and gold stocks are relatively cheap . A recent Bloomberg article (see above) pointed out that most gold stocks, when measured by P/E metrics, are the cheapest that they’ve been since 2002.

The ratio of most gold stocks is about 17 times earnings at the moment — compare that to the 10-year average of 37 times earnings and you quickly see the situation at hand. However, when you DYOR you will find a select number of profitable gold miners at substantially lower p/e's. Unfortunately, though, many do not pay any dividends (yet), such as AIM-listed Goldplat, but some could feature in more speculative value/growth portfolios.

Steven Dotsch - Dividend Income

Book: Guide to Dividend Investing
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About Will Bancroft

Will Bancroft

Will is Co-Founder and COO of The Real Asset Company, a platform for buying gold and silver bullion efficiently online, stored in a global range of vaults. Will manages digital and operations, also finding time to contribute to the Research Desk alongside Jan Skoyles. He is Austrian in his economics, liberty minded above all else, and an active DIY investor. more »


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