Don’t look now, but the trade war is turning into a currency war.

This month, the United States labeled China a “Currency Manipulator,” turning the tensions between the world’s two largest economies to a boil.

U.S. Treasury Secretary, Steven Mnuchin, accused China of manipulating its currency “to gain unfair competitive advantage in international trade”. Now, the U.S. will turn to the International Monetary Fund to “eliminate the unfair competitive advantage created by China’s latest actions”.

Earlier this month, the Chinese currency – the yuan – tumbled below 7 per U.S. dollars, marking an 11-year low.

“The drop suggests that the central bank of China is willing to weaponize the currency in light of the trade war,” Andrew Collier, managing director of Orient Capital Research in Hong Kong said in news reports.

Countries benefit from weaker currencies as it makes the cost of their exports cheaper to foreign buyers, and thus stimulates demand for their goods and economic growth.

It’s not just China that wants a weaker currency.

President Trump has tweeted his demands for a weaker U.S. dollar and has publicly called for lower interest rates from the Fed, which does push the dollar lower.

While the value of a nation’s currency may seem a bit esoteric, this is a significant development.

Students of history may remember the last time we had a global competitive devaluation was in the 1930’s. Yep, the Great Depression.

As the global economy began slowing in 1930, countries began slapping tariffs on imports to protect their own country’s interests. The most famous, or infamous, is the Smoot-Hawley Tariff passed by the U.S. Congress which imposed tariffs on many imported goods.

“But each move – devaluations, tariffs, and other attempts to level the playing field – led to more retaliation. In the single year that elapsed between the third quarter of 1931 and 1932, world trade declined 16 percent. One historian described the series of events as an “uncoordinated break-up” of the global currency regime,” according to Bloomberg.

Sound familiar? Tit for tat rarely ends well.

You remember what happened next. The Great Depression.

Fast forward to today.

Britain is on the brink of moving out of the European Union, which will trigger a massive devaluation of the pound versus the euro.

The United States and China are already lobbing currency strikes, each government attempting to push its currency lower.

As all these major global currencies like the dollar, the yuan and the pound weaken, it will force other countries around the globe to join in the devaluation to avoid turning their exports into a standstill.

The United States and China trade war lit a match. That fire is getting bigger and harder to control.

As countries race to lower their currencies, the only winner is gold and investors who own gold.

Gold remains the world’s premier safe-haven asset. Gold is a global currency without any of the obligations, debts or deficits that come along with the U.S. dollar or any other currency.

While countries debase and manipulate their fiat currencies, gold is climbing – up nearly 20% this year. Goldman has a six-month forecast of gold at $1,600. Citi sees the same rise to $1,600 in six months to a year, and Bank of America Merrill Lynch sees prices climbing toward $2,000 within two years, topping the record of $1,921.17 reached in 2011.

The trade war and the developing currency war will get worse before they get better. While the U.S. Administration is beholden to two four-year limits on presidential power, the Chinese government has no constraints. They are in for the long game.

Consider increasing your allocation to gold, a hard asset that is climbing in value, not falling, and is safe from government or central bank manipulation.

The only winners in a currency war are those who own gold.

Call Blanchard today at 1-800-880-4653 to learn the optimal amount of gold you should hold in your portfolio.

Money makes the world go round.

But, what is money?

That $20 bill in your wallet is money. Throughout history, cowrie shells, barley, even peppercorns have been used as money. Do any of these things actually have intrinsic or real value? One could argue no.

What gives things like paper money, the $5, $10, and $20 dollar bills you get from the bank value? It’s the backing and promises by the U.S. government that this has value. Essentially, American society is built around the agreement that this paper money has value.

For the vast majority of human history, however, people relied on gold and silver as money.

The traditional definition of money states that it is a:

• Store of value, which means people can save it and use it later
• Unit of account, which provides a common base for prices
• Medium of exchange, something that people can use to buy and sell with

“Precious metals seemed to serve all three needs: a stable unit of account, a durable store of value, and a convenient medium of exchange,” according to an International Monetary Fund blog post.

Precious metals are hard to obtain. There is a finite supply of them in the world. They stand up to time well. They are easily divisible into standardized coins and do not lose value when made into smaller units. In short, their durability, limited supply, high replacement cost, and portability made precious metals more attractive as money than other goods, the IMF said.

Gold coins were first created by King Croesus of Lydia, now part of Turkey, around 550 BC and circulated in many countries before paper money was created.

When paper money was first printed it was tied and backed by gold.

As the American economy developed, a strong tradition of gold as money unfolded.

In 1913, the Federal Reserve Act provided for the creation of Federal Reserve banks and a system overseen by the Federal Reserve Board.  U.S. law required the Federal Reserve to hold gold equal to 40 percent of the value of the currency it issued. The Federal Reserve Notes were convertible into gold at the fixed price of $20.67 per ounce.

In 1933, a financial crisis spurred Americans to convert their paper money for gold, which sparked a massive outflow of gold from the Federal Reserve.

Individuals wanted real physical gold. Not paper money. A rush on the banks began.

In March 1933, the Federal Reserve Bank of New York could no longer honor its commitment to convert paper money to gold and President Franklin D. Roosevelt declared a banking holiday.

Ultimately, President Roosevelt issued an Executive Order requiring all Americans to surrender all gold owned by them to a Federal Reserve bank and prohibited the private holdings of all gold coins and bullion.

Blanchard and Company has deep roots in gold’s history in America.

Decades after President Franklin D. Roosevelt prohibited private U.S. citizens from owning gold, one of our company’s founders – Jim Blanchard – rose to prominence as a supporter of American’s right to own gold in the early 1970s.

He gained national attention when he arranged for a biplane to tow a banner proclaiming “Legalize Gold” over President Richard Nixon’s inauguration in January 1973.

His lobbying efforts were a success and after more than 40 years, Congress once again legalized private ownership of gold bullion effective Dec. 31, 1974. Once the gold restrictions were lifted, Blanchard founded our company in 1975 and helped build it into of the nations largest and most respected tangible asset investments firms.

Owning gold and other precious metals makes as much sense today as it did a thousand years ago, perhaps even more so given the changes that have occurred on a governmental and monetary policy level. Diversification in tangible assets makes sense for all investors for a small portion of their portfolio in order to preserve and grow wealth.

As history shows, gold was the world’s first currency and may remain the only true currency available today. Why own it? Check out this compelling research from Penn State University professors on how gold improves portfolio performance, download it free here.

As we make our way through the second half of 2019 several factors are influencing gold. The World Gold Council has reported on these characteristics and in this post,  we break down each one. We will examine why they are important and what they might mean for investors.

Global Monetary Policy and Interest Rates

Until recently interest rates were on the rise and expected to continue their increase. However, in just the past few days we have seen a reversal of this trend. The Federal Reserve cut interest rates for the first time in over ten years. Reserve Chairman Jerome Powell explained his reasons for the cut by citing growing trade tensions and a slowdown in global growth. As Gary Richard, professor of economics at the University of California, remarked “The Federal Reserve has generally better information about the economy than most of the public, and they have a lot of experts there – they’re trying to predict the future. And the Fed is acting now as if we’re in a recession.” For many, that is a frightening prospect.

Moreover, this fear of a contraction in the economy is shared abroad. The European Central Bank’s (ECB) President announced his intention to cut interest rates. Many expect the Bank of Japan to do the same. While a slowing global economy presents some problems it also presents some opportunities. As the World Gold Council remarks, “Our research indicates that the gold price was higher in the 12 months following the end of a tightening cycle.” They continue, “historical gold returns are more than twice their long-term average during periods of negative real rates – like the one we are likely to see later this year.”

Balancing Risk

This low interest environment has spurred a significant amount of the stock market’s rally in the last six months. This dynamic is a problem because it means that heightened valuations are the result of stimulus measures rather than strong underlying fundamentals. Additionally, equity growth from interest rate cutting cannot be sustained. At some point there will be nothing left to cut. Investors are entering a playing field in which they need to diversify risk. As the World Gold Council points out, bonds have traditionally served this need with their more favorable risk profile. However, as yields fall, prices are increasing and “70% of all developed market debt is trading with negative real yields with the remaining 30% close to or below 1%, according to their analysis.”

This scenario underscores the value of gold as a risk hedge when other traditional equity hedges, like bonds, become less attractive. As we have explored in previous posts, gold, as a universally accepted currency, has qualities not shared by asset classes like stocks and bonds.

Long-Term Structural Support

Gold demand in countries like China, and India will remain important to gold investors. While there are some signs that consumer demand will soften within the next several months, there are structural reforms in place in both countries which present a favorable long-term picture for gold. A broad ecosystem for trading gold is shaping this reform. With such systems in place it becomes easier, and more efficient to buy and sell gold. Moreover, economic policies that help broaden the middle class will drive gold purchases in the future as the precious metal becomes available to more citizens in some of the most populous countries in the world.

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