G20 on currency wars: ‘nothing to see here folks’

2013-FEB-18

Gold fell to $1,600/oz on Friday, with Chinese buyers absent from the market owing to the Lunar New Year holiday and news that George Soros reduced his stake in the exchange-traded fund GLD pressuring the metal. Front-month Comex gold recorded its lowest close since August, while silver traded below the $30 mark for the first time in a month. Even platinum and palladium – standout performers in the precious metals markets recently – had a tough day. As seen with gold during January, platinum has kept being pulled back to $1,680.

The Soros news is difficult to interpret, as these reports concern regulatory filings for paper stock (the GLD), which tell us nothing about what he’s doing in the physical gold market. He could be selling his paper gold in order to buy physical. Moreover, if he and other large investors desire more bullion, talking weak hands into selling is one of the oldest tricks in the book. Soros has form here: back in January 2010 he described gold as “the ultimate asset bubble”. Does that mean he was buying no physical gold (or even selling) at that time or in late 2009? Perhaps, but it seems unlikely.

The Moscow G20 gathering closed with a pledge from the participants not to resort to currency wars, but this falls into the “they would say that wouldn’t they” category. What term other than currency wars can be reasonably used to describe the noises coming out of Japan recently – or indeed Bank of England Governor Mervyn King’s remarks last week that the BoE will continue to ignore its 2% inflation target for years to come, or Ben Bernanke’s speech in Tokyo last October, described by Reuters as “a blunt call for certain emerging economies to allow their currencies to rise”? Even the Norwegians are suiting up for battle.

Previously the elite simply denied the existence of such a phenomenon; but with evidence piling up with every passing week, this ostrich pose is no longer possible. Their new line is that currency wars are actually a good thing, and that – to put it crudely – if we all inflate together, we’ll be ok.

But taking a step back: what exactly is wrong with deflation?