Fed Joins in No-Win Currency Game
Source: The Wall Street Journal, Michael Casey (9/21/10)
"Positioning for significantly higher gold demands a bold strategic bet. . ."
Although the Fed would be very unlikely to intervene in currency markets as Japanese monetary authorities did last week, it's rooting for a weaker dollar. That's one upshot of Tuesday's statement in which the FOMC said U.S. inflation is lower than the Fed's mandate permits, thus implying a willingness to take more credit-easing measures if needed.
More critical commentators argue that by keeping the door open to further liquidity injections, the Fed is debasing the currency. Weakening the dollar is a good policy to fight deflation in a perfectly balanced world. But everybody else is worried about losing competitiveness and want to debase their currencies, too.
The ECB is buying member countries' sovereign bonds and accepting banks' dubious collateral in return for a cheap, long-term credit facility.
Emerging Asian and Latin American countries are turning more interventionist as their strengthening currencies hurt their exporters. . .Brazil's CB bought $18.6B to weaken the real in the eight months to August, up from $7.3B in the same period last year.
The Bank of Korea and Southeast Asian CBs have also, repeatedly, done this. Of course, the mother of all interventionist policies is China—with its explicit policy of keeping the yuan undervalued.
Even so, the intervention/easy money game is making it hard for traders to pick appreciating currencies. That's one reason gold keeps hitting record highs.
Positioning for significantly higher gold prices over the long run demands a bold strategic bet—that the global monetary system, as we know it, will completely break down and be replaced with a gold standard. With competitive devaluations damaging the system, this might seem like a good call now. That's why gold looks headed toward $1,300/oz.