Roubini: Currency wars coming, but don't bet on gold

New York (Dec 6)  At the end of October, the Bank of Japan announced that it would increase its quantitative easing program.  In an unexpected move, the bank increased its purchases of Japanese government bonds to grow its monetary base to 80 trillion yen (about $730 billion) per year up from 60-70 trillion yen.

Nouriel Roubini, professor at New York University and chairman of Roubini Global Economics, believes that this was a dangerous move that could trigger a round of currency wars. “Domestic demand is weak in advanced economies, and the only way to grow the economy is to weaken currency in order to boost net exports,” he says. Because trade balance is a zero sum game, he explains, countries have to compete for a larger share of the market by continuing to lower their currencies.  Roubini predicts that this will lead to a full-out currency war.

Roubini says that reactions to Japan’s increase in QE can already be seen throughout Asia. “From Korea to Malaysia to Thailand…even the Central Bank of China has recently cut rates to avoid the strengthening of its currency.” While China is not outrightly participating in QE, the central bank recently moved to loosen monetary policy by reportedly lending the state-owned China Development Bank one trillion yuan (over $160 billion). On November 6, the Chinese central bank confirmed that it had lent an additional 769.5 yuan to commercial banks.

Currency war contagion

The contagion of lowering currency value will hit Europe next, says Roubini. “The first to be hurt by a weak yen [will be] Germany and the Eurozone so the ECB will have to do quantitative easing,” he says. “The Swiss National Bank, the Norwegians and the Central Europeans” will have to follow.

All of this easing would imply that the only currency increasing in value will be the U.S. dollar, leading to a currency shock stateside. Janet Yellen and the Federal Reserve plan on increasing rates towards the middle of 2015, “but if the rest of the world growth disappoints…and the dollar keeps appreciating, at some point those facts are going to weaken U.S. growth and inflation and weaken U.S. competitiveness.” This, Roubini believes, will force the Fed to delay hiking rates.

The price of gold

Even with currency wars, gold will remain weak, says Roubini. “For now the Fed is not easing, and the dollar is strengthening,” he says. Gold is a hedge against inflation, but Roubini believes there are many assets now that are better and that can provide an income, like real estate, equities and credit. Gold can only provide capital gains. “Real rates are going to go higher so all of the main factors regarding gold indicate that gold will go down.” He says the rate will near $1000 per ounce by the end of 2015.  It currently hovers at around $1200 per ounce.