How gold will benefit from a currency war

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. Read: Michael Casey: Japan needs a weaker yen.

Historically, the precious metal trades inversely to the U.S. dollar DXY +0.12% , as it did on Thursday and Friday. It was a usual story: gold prices fell sharply as the greenback strengthened at the expense of the euro EURUSD -0.0294% on Thursday and as the Japanese yen USDJPY +0.7038% weakened on Friday. See Friday’s story: Gold settles sharply lower, down over 3% on week.

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Why no one will win the currency war

Airlines like AirAsia and SpiceJet are seeking growth through non-ticket revenue. With Japan, China and the U.S. all pursuing weak-currency policies, major economies are retaliating. China's banks have recently been exceeding their lending limits.

But as various currencies become devalued, gold may take on an even stronger role as a 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 +0.0700% and the Japanese yen 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 -1.54% traded at around $260 an ounce on the Comex division of the New York Mercantile Exchange. Gold closed at $1,609.50 on Friday — a 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 continuing 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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It “takes place when countries actively compete to gain an advantage against each other by weakening their currencies, thus making their exports cheaper and imports more expensive,” said Julian Jessop, chief global economist at Capital Economics, in a recent note to clients.