Gold Rallies as Japan Joins Global Currency War

By: Ben_Traynor

THE DOLLAR gold price climbed to $1671 an ounce Thursday lunchtime in London – just a Dollar or so below Wednesday's record high – while stocks and commodities fell after Japan became the second country in as many days to try to halt the rise of its currency.

Silver prices traded in a tight range around $41.70 per ounce – up 4.6% for the week so far.

The Euro gold price meantime set another record at the London Fix, at €1170.61 per ounce.

"It seems that investors hold gold in strong favor amid concerns of further debasement of fiat currencies," says a note from Swiss precious metals group MKS.

"People are looking for a safe haven," agrees Barclays Capital analyst Xin Yi Chen.

"Currencies like the [Swiss] Franc and Yen have...declined recently, so investors have very few places left to put their money... we expect investor flows to remain strong and gold's uptrend to continue."

Japan sold ¥1 trillion on Thursday in an effort to prevent the Yen rising further on the world's currency markets.

The Bank of Japan meantime increased by 20% the value of monetary stimulus program, boosting it to ¥50 trillion.

"I will continue to watch the market closely and will take appropriate action," said Japan's finance minister Yoshihiko Noda.

The US Dollar rose 4.1% against above ¥80 per Dollar following the announcement, while the Yen gold price rose 3.9%.

Japan intervened in the currency markets at the start of April following the earthquake and tsunami. The Dollar rose to a high of ¥85 Yen, but then began a slide to less than ¥77 yesterday.

The April move was implemented in concert with other G7 nations, whereas Thursday's move saw Japan acting alone.

"The Yen's level now is still a very tough level for exporters," says Junko Nishioka, chief economist at RBS Securities Japan.

"If US jobs data and other upcoming US economic events fan worries about the US economy, the Yen may appreciate again."

The latest US nonfarm payrolls data are due this Friday.

"[Wednesday's] monetary easing by Switzerland provided the push because if Japan didn't respond this would push the Yen still higher," reckons Nagayuki Yamagishi, strategist at Mitsubishi UFJ Morgan Stanley Securities.

The Swiss National Bank cut its interest rate to "as close to zero as possible" on Wednesday.

The Dollar jumped 1.7% against the Swiss Franc following the announcement, but then reversed most of the gains within a few hours. The Dollar is down 18% against the Swiss Franc since the start of 2011. 

As of Thursday lunchtime, the Swiss Franc gold price was down 1.96% over the same period.
"It seems a fresh chapter is opening up in the currency wars," says Chris Turner, chief currency strategist at ING.

"Both Japanese and Swiss officials [are] trying to draw lines in the sand regarding the strength in their currencies they are prepared to tolerate."

Turner says both countries face "a long and drawn-out campaign".

"For Japan the (US) Fed is more likely to cut than hike interest rates and thus the Dollar remains pressured, and for the Swiss there seems no resolution to the debt crisis (in the Eurozone)."

The US Dollar's status as the world's reserve currency "appears to be slipping" say members of the US Treasury Board Advisory Committee – which includes representatives of major banks and bond funds – according to documents published Wednesday.

"The idea of a reserve currency is that it is built on strength, not typically that it is 'best among poor choices'", states one TBAC member's presentation cited by news agency Bloomberg.

"The fact that there are not currently viable alternatives to the US Dollar is a hollow victory and perhaps portends a deteriorating fate."

Here in Europe, the yield on Italian and Spanish 10-Year government bonds remained above 6% for most of Thursday morning, following sharp rises earlier in the week that prompted emergency talks between Italian finance minister Giulio Tremonti and Jean-Claude Juncker, chairman of the Eurogroup of single currency zone finance ministers.

Until recently the yield on both countries' 10-year debt had barely risen above 5% over the last five years – implying investors have begun to demand a higher risk premium for holding it.

"We will continue our meditation," Juncker told reporters after the talks, which Tremonti described as "fruitful". 

José Manuel Barroso, president of the European Commission, yesterday urged Eurozone governments to "address the sovereign debt crisis with the means commensurate with the gravity of the situation."

In central bank news, the European Central Bank held its main interest rate at 1.5% on Thursday, while the Bank of England also kept its main interest rate on hold – at 0.5%, where it has stayed since March 2009. 

By Ben Traynor
BullionVault.com

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

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