‘We see gold as an officially recognised form of money for one primary reason: it is widely held by most of the world’s larger central banks as a component of reserves.’
– Duetsche Bank analysts Daniel Brebner and Xiao Fu
Brazil’s finance minister Guido Mantega made headline writers all over the world happy a few years ago when he announced the beginning of the Currency Wars. Mantega made his original comment when the US Fed came out with QE2 in 2010.
Last week, he concluded both the Fed and the Bank of Japan were engaging in currency warfare.
He’s right about that. Currency debasement as a way to boost growth and exports is all central banks have left. It’s also the only strategy they have for pumping asset prices and preventing the large global credit and derivatives bubble from popping. It forces everyone to ‘race to the bottom’.
For Brazil, that may mean taxes on capital coming into the country. That’s the weapon the country employed last time to make the Real a less attractive currency to own. But with the Fed and the BoJ committed to even more debasement, Brazil, like every other emerging market country, will have to get cleverer if it wants to engineer currency weakness.
The Asset to Own During Currency Debasement
About the only winner I can see in the currency wars is gold. The boys from Deutsche Bank seemed to figure that out last week, too. The quotation at the top is from a new research report by analysts Daniel Brenber and Xiao Fu. They make the point that you know gold is money because so many central banks own it. They go on:
‘We would go further however, and argue that gold could be characterised as ‘good’ money as opposed to ‘bad’ money which would be represented by many of today’s fiat currencies.
In describing gold as such we refer to Gresham’s Law – when a government overvalues one type of money and undervalues another, the undervalued money (good) will leave the country or disappear from circulation into hoards, while the overvalued money (bad) will flood into circulation.’
I’ve always thought that Gresham’s Law was the best refutation of Warren Buffett’s silly comments about gold. Buffett complains that gold makes no sense because you dig it up out of the ground in order to put it in a vault. Gold has no yield, no earnings, and isn’t a business.
But the more valuable something is – good money in Gresham’s Law terms – the less likely you are to use it, sell it, or exchange it. You store it for a rainy day and hold on to instead. That’s why central banks keep gold. It’s money, and fiat currencies always die.
With a dearth of quality collateral in the world’s financial system, gold gets more valuable by the day. Rather than trying to ride the Fed’s liquidity wave through stocks, I’m content to accumulate physical gold and silver.
Dan Denning
Editor, The Denning Report
From the Archives…
In Defence and Praise of ‘Cranks and Crazies’
21-09-2012 – Kris Sayce
We Buy Gold Because We Don’t Trust Them Not to Meddle
20-09-2012 – Kris Sayce
Why Share Trading is ‘Mental’
19-09-2012 – Murray Dawes
A Bear Market Where You Least Expect
18-09-2012 – Greg Canavan
Questionable Easing 3
17-09-2012 – Dr. Alex Cowie
