Currency Wars, Gold and Treasuries

A couple of interesting things from the Dave Rosenberg newsletter today, quote:

Guido Mantega, Brazil’s Finance Minister, had (this) to say yesterday: 

“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness.” 

 

 It isn’t hard to see why gold has been doing well in this backdrop.  Protectionism is also creeping up, as the US congress pushes forward on sanctions against “currency manipulators,” meaning China, and China retaliates with tariffs against imports of US poultry.  Note that this is also a positive for US treasuries as they remain an asset of choice for foreign central banks looking to weaken their currencies versus the US dollar.  The WSJ just came out with a story on this as well “Currency Wars: A fight to be weaker”

 

For those who are worried that gold is overpriced, this chart (from Sept 24) is somewhat reassuring:

 This one was interesting in showing historical US long-bond yields, and predicting it could hit a Japanese-like 2% (from 9/23):

It might seem odd to be thinking of a continued rally in bond yields as well as gold.  However, this is a debt crisis requiring massive deleveraging of consumer and government balance sheets – meaning suppressed demand for some time along with excess production and employment capacity that will keep a lid on the CPI, which is the inflation measure most worried about when pricing bonds.  Similarly, food and oil prices should be contained because they are dependent on cost to produce and consumer demand.  Gold, on the other hand, is becomming viewed more and more as a currency which is being supplied through mining at a much lower rate than paper money is growing through the central banks.  Gold also tends to be more of an uncertainty hedge than an inflation hedge, and the opportunity costs of holding it are as low as the US treasury yields, so it should continue to do well in a low interest rate environment.

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About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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