Gold, Inflation and Currency Wars

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Gold has been a major topic of talking heads and investment advisors in recent months especially as emerging market central bank purchases begin to dwarf developed nations' reserves.

The major moves in gold have come off the back of stimulus measures and recently announced plans for easing. As previously discussed, gold is historically used as a mechanism to hedge against inflation and paper value debasement. This time is no different as the recently announced Chinese stimulus, ECB bazooka, and Fed Easing plans are flooding markets with cheap liquidity and financing.

The global currency war has reached the next phase as the major global powers are engaged in a battle to weaken currencies and stimulate export growth to shore up economies.

Note the major gold breakout that occurred in August from a several month consolidation pattern has since exceeded over 150% of the original trading range. As traders increased expectations of easing, prices only moved higher.

The central banks just now have upped the inflationary rhetoric and ante with the recent easing moves which could see higher input prices as oil crosses $100 threshold.

How will economies respond with higher production prices stoked by easing measures? Will this feed inflation further.

Is Mervyn King going to throw his hat into the inflationary ring next with further easing announced by the Bank of England now that all other major parties (PBOC, ECB, FED) have acted? Sell-side analyst expectations for gold have only risen, averaging near $2000 per troy ounce just as famed investors like George Soros and John Paulson add to gold holdings in anticipation of further increases.

Gold declined for a second day as the rally to a six-month high prompted some investors to sell the metal for cash. Platinum and palladium dropped. Spot gold fell as much as 0.4 % to $1,753.75 before trading at $1,756.50 in Asian hours .

*** Gold gained to $1,778 on Sept. 14, the most expensive since Feb. 29, after the U.S. Fed announced a third round QE, to boost growth. Gold is 8.7 % higher from July 26, when ECB Mario Draghi said policy makers will do whatever is needed to preserve the euro. Draghi last week gave details of a plan announced in August to buy debts of member states. China last week approved infrastructure spending plans to support growth as Europe's concern hurt exports.

***The euro, metals and stocks fell yesterday as European Union finance ministers failed to agree on a timetable for a

more unified banking system and over terms of the rescue fund requests and the role of the EBC at a meeting on sept. 14 in Cyprus.

**** Spot silver dropped for a third day, falling as much as 0.6 % to $34 an ounce, and was last at $34.125. Palladium fell 0.6 % to $677.50 .

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Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reached a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.Read the Terms of Service

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