By Peter Cooper

China has just announced its largest devaluation in two months of 177 pips which put a rocket under the gold price this morning. It breached the important technical barrier of $1,170, setting the precious metal on a path for $1,200 an ounce and more.

Central banks are always pathological liars when it comes to exchange rates. They have to be. Imagine what would happen if they said, �Hey yes we are going to devalue big-time!�

Recovery strategy

The Chinese authorities� strategy to get out of their current recession is clear enough: increase exports, decrease imports and that means getting the currency down to make its goods competitive again in world markets and imports more expensive.

As ArabianMoney noted when the first devaluation came earlier in the summer there is no point in stopping at a couple of per cent which will make no difference. A 15-20 per cent devaluation of the yuan is necessary. After all that is what the euro has achieved over the past 18 months.

Indeed, that is part of the problem. China needs to stop shadowing a higher dollar in order to export competitively again to the European Union, the world�s largest economy if treated as a single bloc.

However, these are dangerous games to play, or currency wars as some economists describe them. In this game of pass the parcel somebody always ends up with an overvalued currency that hurts its economy. It�s a zero sum game and a race to the bottom, not a way back to economic prosperity.

Golden goose

To be a winner you want to hold the currency that no central bank can print. That�s gold and silver, the monetary metals. The only currency to survive the test of history.

Short term you can see why gold broke the $1,170 an ounce mark today, a key technical level for some chartists. If you are a Chinese yuan investor then you just saw your wealth shaved down, while if you are Chinese and have a gold bar under your bed then you are 177 pips better off, plus today�s rise in the gold price.

Then again if you are Chinese and you start to see a 15-20 per cent devaluation within the next six months where will you want to invest your money? Gold prices could go very much higher from here as investors finally get it!

http://www.arabianmoney.net/

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 -- Published: Wednesday, 14 October 2015 | E-Mail  | Print  | Source: GoldSeek.com

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