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Lear Capital: Gold and the Currency Tug-O-War

It's become no secret that the currencies of the world are competing to be the weakest. The \"Race to Debase,\" as it has been referred to by many commentaries and articles. I liken it more to a tug of war with each side taking turns dragging down the value of their own currency.

Over the last three months, or so, the dollar has been a consistent winner with winning really meaning losing - value that is! Now, in the last few days, foreign currencies have begun to pull back as the advantage has shifted to the other team.

Responsible for perhaps the biggest surge on the dollar side, was the somewhat vague proclamation by the Fed that more quantitative easing is on its way. That gave the dollar team a boost of energy and the dollar grew weaker. As the days past, the Fed statement grew more ambiguous as the method of QE or amount of such, has remained unsettled.

Now, uncertainty over uncertainty has set in. Some believe the Fed said just enough to bring the dollar down one more notch while saving details (conserving energy) for a time when the dollar team needs another boost.

In response to all of this, Gold prices react accordingly. Denominated in dollars, the gold price rises as the dollar weakens. When the dollar shows strength Gold prices retrace as traders betting on the contest, take profits to satisfy investor fans.

My bet is still on the dollar - losing that is. I would say he who has the power to print more of the world's recognized reserve currency, will ultimately win the tug of war. The Fed is basically the dollar team ringer.

In the last few days the gold price has retraced some $60 per ounce. Wow - it's all the way down to $1325 an ounce. If I told 6 months ago that I would be reporting that gold prices, after a sustained run, would be pushed down to $1325 an ounce, you would have sold the house and piled it all into gold. Instead investor heads are filled with thoughts that the gold rally is over.

To this I say, figure out what you believe in and stick with it. If you believe the world is in a tug of war battle to debase currencies, then you have to believe the advantage in battle will constantly shift. When one side loses the advantage they print more of their own currency or reduce interest rates or buy their own bonds or create some new tactic of winning the battle to lose the war.

How low can currencies go? Measured by some in terms of inflation rate, hyperinflation is sometimes defined as inflation at 50% per month. We're a long way from that so I say let the war rage on. And when the gold charts wiggle up and down from time to time, don't second guess what you believe.

When you look even five years down the road, it's hard to see any real change in our debt situation without more inflation, more stimulus, more bailouts, more quantitative easing of some kind. Therefore it is hard to see dollar strength or diminishing gold demand. So, enjoy the battle and know that every time the advantage shifts from one side to the other, Gold Wins!

A tug-of-war, if you will, with each government pulling as hard as they can to drag down the value of their own currency. The \"Race to Debase\" as it has been referred to in many commentaries and articles.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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