“The lessons for the present are clear. Today most advanced industrial economies remain, to varying extents, in the grip of slow recoveries from the Great Recession. With inflation generally contained, central banks in these countries are providing accommodative monetary policies to support growth. Do these policies constitute competitive devaluations? To the contrary, because monetary policy is accommodative in the great majority of advanced industrial economies, one would not expect large and persistent changes in the configuration of exchange rates among these countries.”—Federal Reserve Chairman Ben Bernanke, 3/25/2013
Translation: “It’s just a little devaluation, c’mon man, everybody’s doin’ it.”
Despite denial from Federal Reserve Chairman Ben Bernanke, we are indeed in the midst of a global currency war. This isn’t a war that is being waged with trade tariffs and overt currency devaluations, but a covert war being waged with dueling money printing presses from the world’s largest central banks. A distinction without a difference, wouldn’t you say? Dr. Bernanke is being disingenuous when he says otherwise. The country with the world’s reserve currency (that’s us) can’t devalue its exchange rate by printing money without compelling its trading partners to make retaliatory moves.
A Race to the Bottom
With the escalation of a covert currency war risking a global race to the bottom in the many of the world’s fiat currencies, a properly diversified portfolio must include assets that help hedge the risk of currency debasement.
World’s Only True Hard Currency
First on our list of fiat currency hedges is gold. Gold is the world’s only true hard currency. All portfolios should include gold. Gold is not only a currency hedge, it is also an inflation hedge, and a hedge against geo-political risk. Over long periods of time, gold retains its purchasing power.
If you missed the 12-year bull market in gold or your portfolio is short on the precious metal, the recent correction in gold prices is an opportunity to build a position in gold. The larger your portfolio, the more gold you can afford to buy. For most investors, a 5% gold component is advisable.
When you buy gold, it is crucial to approach your investment with a different mentality than you would approach most other investments. Gold should be viewed as a permanent holding in your portfolio. You don’t want to buy gold to sell it to a higher bidder in the next month or year or two years. If everything goes according to plan, the gold that you do buy will fall in price, because, as should be evident from the last few months, when gold prices fall, everything else in your portfolio is likely to rise.
Jeremy Jones, CFA
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