Commodities | Oct 05 2010
By Greg Peel
The world is currently in an undeniable currency battle as each major export region attempts to devalue its currency against the other. The bottom line is that not everyone can devalue uniformly because exchange rates are merely relative. Devalue your own currency and by default you also revalue someone else's.
Last week the Brazilian finance minister suggested the world was on the verge of an all out currency “war”, notes respected trader Dennis Gartman in his latest newsletter, which is significant given the annual meeting of the International Monetary Fund begins later this week in Washington. But as to whether the “battle” becomes a “war”, featuring global acrimony and tit-for-tat retaliation, is another matter, given the IMF director has voiced his protest at currency warfare and anti-trade policies. Even US Treasury Secretary Timothy Geithner has dismissed such notions.
That's all well and good, but we know that the Fed is supposedly close to implementing another round of quantitative easing, that the UK is considering more easing, that the Bank of Japan is acting to keep a lid on the yen and the the Swiss National Bank has been selling francs for some time. The BoJ has since suggested it will only act to prevent currency volatility per se, rather than simple currency devaluation, and the SNB has now given up on trying to cap the franc given the cost.
And the US House of Representatives has just passed a law allowing the Commerce Department free rein to apply tariffs on Chinese imports. While this bill is unlikely to ever pass through a less reactionary Senate, the message is clear.
It is because of all of the above that gold is now trading above US$1300/oz, and is also up in recent months in terms of other major currencies. Gold is being seen as the one, the only, truly safe currency in a world in which central banks are playing a game of “Call that a printing press? This is a printing press.”
But gold has become dangerously popular. At the peak of the GFC crisis, mints across the world were unable to keep up with the retail demand for gold coins and that is now once again the case. Investment in gold exchange-traded funds is at record levels. Long positions in gold futures are at record levels. Central banks have ceased being net sellers of gold. In short, everyone is setting themselves in one direction.
While this doesn't mean everyone is thus wrong, it does mean that the slightest little trigger could cause a panic. Gold is overdue for at least a short-term correction even if it's hard to see what might set a correction off right now.
A correction would be triggered if the Fed came out and said it was toning down its QE2 plans. Yet that is not terribly likely at this stage. More likely is a big sell-off in the euro, and thus a subsequent jump in the US dollar index. Dennis Gartman suggests the euro is now “preposterously over-valued and certainly over-extended on the upside”. In technical terms, the euro has made a Fibonacci retracement of its bear crash earlier this year and after slipping last night in offshore trade, the signals have turned negative.
Gartman admits that gold may yet move higher, but the risk is that “the inevitable correction shall be violent and very severe”. He would not be surprised to see a drop back into the US$1190-1220/oz range in the “not too distant future”.
This does not imply an end to gold's bull market nevertheless, Gartman is quick to add, but he notes that it is gold's tendency to “entice the greatest number of public participants into the fray only to punish the latest entrants for their lateness”.
As I have suggested previously, if your cab driver tells you he's just bought gold then be afraid.
