Currency Instability and Strong Gold

Asia/West currency and trade frictions- and gold. Chris Laird at http://www.prudentsquirrel.com/

The rapidly slowing Western economies are causing even more slowing in the Asian export economies. That is not a surprise since they predicated their entire economies on exporting to the West. If the West slows, they slow even more.

This leads us to the Chinese Yuan manipulation controversy. The US, with a new Democrat government which is very labor friendly, is likely to push for sanctions if China keeps the Yuan low. But, the problem is China’s likely strategy to combat their rapidly slowing economy will be to keep the Yuan low, or even let it fall lower to encourage exports.

That will definitely lead to growing US/China trade frictions. If that gets out of hand, with the US bleeding jobs and China too, the recipe will be for trade restrictions or tariffs. And that is what really caused the last Great Depression to deepen in the 1930’s.

The EU zone will have the same reactions to China using a weak Yuan to prop its economy up. ie, certainly trade restrictions and tariffs.

If a trade war develops and there are competitive currency devaluations (each country lowering its currency to try to stimulate exports) then you can guarantee that gold will rise inexorably. Gold will then detach from its commodity correlations, and become primarily driven by currency developments around the world. This is already starting to occur.

With the trouble the British Pound, the Ruble, the Euro, the Korean Won, and the USD are facing, and then add this pending competitive currency devaluation, gold will be the final measure of the whole situation. It will rise relentlessly in all of these currencies.

Now, gold is already near new highs to the Pound and the Euro. It’s not at a new high to the USD as of yet because the USD has risen so much since April of 2008, from about 70 on the USDX (basket of currencies heavily Euro weighted) to around 85 now. But gold will rise to new highs in the USD too, and we believe likely this year.