How gold will benefit from a currency war

Talks about a so-called currency war have been becoming more popular. Efforts by countries to boost growth with massive stimulus programs, which in turn devalue their currencies, can benefit prices for gold. Gold becomes a safe haven investment to individuals as currencies become devalued.

By Myra P. Saefong
Feb. 15, 2013, 6:01 a.m. EST
Market Watch

SAN FRANCISCO (MarketWatch) — Talk of a so-called currency war has been heating up, and it might finally light a fire under gold, too.

Efforts by countries such as Japan to boost growth with massive stimulus programs -- which in turn have devalued their currencies, an aid to exports -- can benefit prices for gold. These have started to alter the precious metal’s relationship with the foreign-exchange market and expand its role as a safe-haven asset.

“We are now moving irrevocably to a time when gold will measure currencies, not currencies measure gold,” said Julian Phillips, a South Africa-based contributor and founder at GoldForecaster.com.

Historically, the precious metal trades inversely to the U.S. dollar DXY +0.09% , as it did on Thursday. It was a usual story: gold prices fell as the greenback strengthened at the expense of the euro EURUSD -.00%

But as various currencies become devalued, gold may take on an even stronger role as a safe haven.

“We are about enter a phase in the gold price where it will rise against all currencies,” said Phillips. “The loss of the Swiss franc USDCHF +0.09% and the Japanese yen USDJPY +0.61% as ‘safe-haven’ currencies, as [the countries] forced their currencies to weaken, has made us all realize national currencies are the same animal in different guises.”

Gold’s bull run began more than a decade ago, with ultra-easy monetary policies by central banks a key reason for the rally.

In February 2001, gold futures GCJ3 -1.71% traded at around $260 an ounce on the Comex division of the New York Mercantile Exchange. Gold closed at $1,635.50 on Thursday — a nearly six-month low, but also more than six times higher than 12 years ago.

“The methodical debasement of fiat currency, via super-accommodative monetary stimulus, is an ongoing trend that has hugely contributed to the 12-year rally in gold,” said Peter Grant, chief market analyst at USAGold.

“Whether this has already degenerated into a currency war or not, it is a trend that seems likely to continue for some time to come,” he said. “And that is ultimately a positive for gold.”

War now or later

So what’s a currency war and are we in one?

A currency war refers to a competitive currency devaluation by countries trying to ease strength in their currencies.

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