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Competitive Devaluation & Gold - 2010
Competitive Devaluation is where many countries allow or encourage their currencies to devalue in order to remain competitive, puts upward pressure on gold prices.

Headline News
We quote a few recent headlines, and opening paragraphs:

Currency Wars to Dominate IMF, G7 Meets - Economic Times
LONDON: The risk of a full-blown global ‘currency war’, with the United States and China as the main combatants, will dominate the annual meeting of the International Monetary Fund and G7 in Washington.
IMF chief Dominique Strauss-Kahn set the tone before the start of the meeting on Friday, warning that the global recovery is still fragile. “There is clearly the idea beginning to circulate that currencies can be used as a policy weapon. Translated into action, such an idea would represent a very serious risk to the global recovery,” he said.
The prospect of currency wars , where countries engage in competitive devaluation of their currencies to stimulate exports and the creation of jobs, has become a major concern in recent weeks...

Will There Be a Currency War? - The Independent
Start with the threat of a currency war. The phrase is "competitive devaluation", when countries race against each other to push down the value of their currencies in the hope that their exporters can gather a larger share of world markets, and that importers will find it harder to sell to them. A number of countries stand accused. At the top of the list comes China. It has maintained a currency peg with the US dollar which, though eased from time to time, in general under-prices Chinese exports. You can argue about the extent of the revaluation needed and you can criticise US fiscal and monetary policy for boosting consumer demand and sucking in so many cheap imports. But the fact that China has such a huge trade surplus with the US suggests that there is some undervaluation. The US Congress, which has long had a protectionist streak, is currently threatening retaliation if China does not permit a further revaluation...

How War Debts, High Tariffs, and Competitive Devaluation Led to War -

Stiglitz Says Fed Policy is Competitive Devaluation - Reuters
U.S. monetary policy is flooding the world with cheap liquidity, Nobel Prize-winning economist Joseph Stiglitz said at the Canadian Consulate’s “Invest in Canada” luncheon yesterday. Our current policy, he explained, acts as a competitive devaluation against emerging-market currencies. Stiglitz added that he is worried about the prospect of a currency war but conceded that there’s not anything we can do about it...

Currency Limbo Dance Should End Soon - Ottawa Citizen
Lately the world's governments have been very self-congratulatory about how, unlike in the 1930s, the economic crisis of the last two years hasn't given rise to an all-out trade war. And by and large, despite plenty of skirmishes, they're right. The WTO reports that world trade has been rebounding nicely from its record 12.2-per-cent collapse in 2009, with growth for this year now expected to come in at over 13 per cent.
Currencies are another matter. One of the curses of the 1930s was "competitive devaluation." In a rush to save jobs in their export industries, countries unpegged their currencies from gold and cut the cost of their exports by making their currencies cheaper. It was a policy that became known as "beggar-thy-neighbour" and, of course, when everybody did it -- and most countries eventually tried -- it was ultimately futile: If everybody cheapens their currency, nobody gets a competitive advantage. Collective resolve never to repeat this nightmare led to the Bretton Woods (New Hampshire) conference of 1944, at which the Allies agreed to the international system of that name that maintained fixed exchange rates for the first 25 post-war years...

Competitive Devaluation is Good for Gold - Automated Trader
GOLD: "Competitive devaluation is good for gold," says A. George Gero, vp global futures at RBC Capital Futures. "European and Asian accounts who hold the U.S.'s greatest export -- debt -- are hedging the decline of the dollar by buying gold." He says record open interest, record prices, record volume, and higher moving averages mean that momentum funds "need" to buy gold...

Competitive Devaluation - iStock Analyst
By: Michael Rivers
The issue I fear most from an economic, political and geo-political standpoint is the huge debt overhang of the largest developed economies of the world: U.S., Europe, U.K. and Japan.
Solving this nightmare is not just an issue for the developed world, either, because it also greatly impacts the developing world (especially Brazil, Russia, China and India).
In order for the developed economies to pay off their debt, they must either grow their way out of debt or print money to inflate away the debt they owe.
Growth would be the best and most honorable way to solve the problem, but growth in developed economies is inhibited by high debt loads (which lead to slower growth) and huge social programs (Medicare, Medicaid, Social Security and their equivalents in the other developed economies).
I'm sorry to admit it, but democracies have never successfully voted away social programs, and I don't think they will this time, either.
That leaves inflation.
But, inflation is a nasty solution to debt problems.
From an economic standpoint inflation is tough to put back in the bottle once you let it out. If you think the Federal Reserve or any other central bank has a dial they can turn to 3%, 5%, or any other specific level of inflation, I'm sorry to let you know that smurfs aren't real, either...

The Fallacy Of Competitive Devaluation - Forbes
By Andrew Tignanelli
Is it more important to buy goods for the best price possible, or to give U.S. manufacturers a competitive advantage against China?
It is amazing how politicians can be so narrow-minded. The first narrow-minded move is the Federal Reserve keeping interest rates low to boost the economy. There has never been any assurance that low interest rates boost an economy (Japan has proved this). In addition, low interest rates are a disaster for savers and income-oriented investors. So while narrow-minded politicians cheer a monetary policy that benefits commercial banks and wire house investment trading, they are punishing the rest of us.
The second narrow-minded move is President Obama, Treasury Secretary Timothy Geithner and Congress getting tough with China to allow the yuan to float against the U.S. dollar. The foolish belief is that if the yuan appreciates against the dollar, then U.S. manufacturers will have a better competitive advantage with the Chinese. This is only partially true, but even if it were perfectly true it comes with the possibility of dire consequences.

End to Currency Dispute Eludes Finance Ministers - Associated Press
WASHINGTON — Differences that threaten the outbreak of a currency war persisted after a weekend meeting of global finance ministers, who left without resolving what to do.
They did agree, however, that the 187-nation International Monetary Fund was the organization best suited to deal with rising global currency tensions that risk overshadowing next month's summit meeting of the Group of 20 nations in South Korea.
The G-20 includes traditional economic powers such as the United States and Europe along with fast-growing economies such as China, Brazil and India.
Various nations are seeking to devalue their currencies as a way to increase exports and jobs during hard economic times. The concern is that such efforts could trigger a repeat of the trade wars that contributed to the Great Depression of the 1930s as country after country raises protectionist barriers to imported goods.
"Currency disputes can easily become trade disputes," cautioned Canadian Finance Minister Jim Flaherty.

Competitive Devaluation, Inflation & Gold
Governments tend to use inflation and / or devaluation (which amount to the same thing) as a stealth tax.
Competitive devaluation could be called a race to the bottom. Normally governments and central banks need to ensure domestic and international confidence in their currencies. After recessions, it may become desirable to allow the exchange values of their currency to drop in order to maintain or achieve economic competitiveness, so the guardians of national currencies try to manage their exchange rates downwards. It can be very dangerous, and can get out of hand.
Over thousands of years, the best defence or insurance against inflation or devaluation has been to hold hard assets or commodities which will retain their value. Probably the best and safest of these is gold.

Quantitative Easing Making more money available usually leads to devaluation.

Spot Gold Chart in US Dollars - 2nd November 2007

Spot Gold Chart in US Dollars - 2nd November 2007
Image Source - The Bullion Desk London

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