Trump Launches Currency War

By Luke Burgess
Written Friday, April 14, 2017
Donald Trump’s presidency is the best thing to happen for the gold market in years.

Everything Trump has done over the past week has been positive for gold. The Syrian airbase strike, increasing tensions with North Korea, and his comments on the U.S. dollar have all caused gold prices to swell nearly 3% in the past five days alone.

gold apr 13 20171

This is a trend we can expect to continue.

Increasing geopolitical tensions between the U.S. and… well, the entire world… will no doubt boil into military conflict somewhere. America’s involvement in Syria is not over by far, and North Korea is a willing foe. And if it’s not war with Syria or North Korea, be sure that someone will continue to challenge the Trump administration.

And remember, Trump is only 84 days into his presidency! So far Trump has only served 6% of his four-year term. He has plenty of time to make more political enemies through Twitter.

But geopolitical instability is just one of the catalysts preparing to launch gold prices into the stratosphere. In a Wall Street Journal interview on Wednesday, President Trump seemingly signaled he was also prepared to wage a currency war.

The U.S. dollar is already in troubled waters amid increasing distrust in the government and the Fed’s monetary policies. But add to this increasing trade disputes with foreign nations, and the result is toxic for the greenback.

In the WSJ interview on Wednesday, President Trump said the U.S. dollar was overvalued. He said, “I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me. But that’s hurting — that will hurt ultimately.

With this comment, President Trump has seemingly launched into a campaign to do exactly what he condemned China for doing: competitively devaluing their currency, a.k.a. participating in currency war.

Many might wonder why a central bank would purposely devalue its own currency. But central banks like the Federal Reserve and PBOC need to control the value of their currency in both directions (devaluing and revaluing) to meet market conditions. Sometimes they want to increase the value of their currencies; sometimes they want to decrease them.

For a country, devaluing its currency increases the purchasing power of foreign buyers, meaning increased exports. The catch is devaluation also increases the cost of imports.

And it’s vice-versa for revaluing a currency. Increasing the value of a currency will decrease the purchasing power of foreign buyers, meaning lower exports. But it will also decrease the cost of imports.

trade apr 13 2017

All this works well and good, with a balance. But when one or more countries find themselves in desperate need of fixing their trade deficit (like today), this tinkering can lead to an all-out currency war.

A currency war works like a price war. It’s the repeated competitive cutting of prices below competitors’. In a currency war, central banks repeatedly devalue their currencies to undercut each other.

For some industries, like the airline industry, a price war can only drive prices down so far. But in the literal moneymaking business, a price war can lead currencies into oblivion because fiat money can be created infinitely.

Immediately following the release of Trump’s dollar comment, the U.S. Dollar Index dropped 0.7%.

Trump dollar comment apr 13 017

The drop was well justified.

President Trump has shown his willingness to wage battlefield war. And now, the WSJ interview shows his interest in fighting a currency war as well.

Despite being officially decoupled for over 45 years now, the price of gold still trades inversely to the U.S. dollar for the most part. Instability in the dollar will serve as a complimentary catalyst to geopolitical breakdowns that will continue to drive gold prices higher and the broader equity markets lower.

Despite recent upward movement, gold is still a buy. Here are three easy ways to invest right now…

Buy physical gold bullion: Physical bullion is the most direct way to invest in gold. It can be purchased from retail coin and bullion dealers as well as online. However, be aware that there are price premiums attached to physical gold. And be sure to first secure a place to sell your bullion when it comes time to divest.

Buy large gold mining stocks: Mining stocks provide greater investment yields than their underlying commodities but are also subject to more risk. Large, international gold producers like Barrick Gold (NYSE: ABX) and Newmont Mining (NYSE: NEM) reduce risk through global diversification of their assets and tend to be the safest among gold stock.

Buy gold royalty and streaming stocks: Gold royalty and streaming companies are not miners. Rather, these firms provide upfront financing to other companies developing gold projects in exchange for future royalty payments or streaming purchase agreements. For investors, large gold royalty companies like Royal Gold (NASDAQ: RGLD) reduce much of the risk associated with the operation side of mining with a very diverse portfolio of royalties and streaming agreements from mines around the world.

 

Until next time,

luke signature

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