Gold News

Not a Currency War. A Revolution, Part I

Why there is now no such thing as a 'safe-haven' currency...

TALK of a Currency War is becoming much more frequent these days, writes Julian Phillips at

What's meant by this is that the competitive devaluation of currencies, which has gone on for such a long time – many years in fact – is going to become destructive to real currency values. This brings into question the entire system of exchange rates.

Now, we have the assurance that the Euro will not be 'managed' down to gain a competitive advantage. Let's watch the rate to see if this is true? Actions speak louder than words, especially those of a politician.

Go back in history to the time when exchange rates were 'Fixed' under the Gold Standard. In those days currencies appeared to be valued against the price of gold, until the US broke ranks by devaluing the Dollar against gold from $20 per ounce of gold to $35 per ounce in 1935.

At that time the United States did not devalue against other currencies, which did not devalue against gold. Arbitrageurs, meaning dealers who bought in one market to sell in another, then went to buy gold in Europe for the equivalent of $20 and sold it at $35 to Washington, helping the US to acquire 26,000 and more tonnes of gold ahead of WWII. This move also enabled the US to inflate its domestic money supply way beyond what the impact of the confiscation of gold two years prior to that had achieved.

After the war, while the Federal Reserve's gold window was open, and central banks could exchange their Dollars for bullion, gold sold by Europeans in the late 1930s was withdrawn and returned across the Atlantic, even at higher prices, as war was no longer a threat.

But then, when the US closed the gold window in 1971, exchange rates began to move from their fixed levels to those that reflected the trade and capital flows more accurately. This was commonplace in Europe. For instance, you knew that the German Mark was going to be revalued when the Bundesbank informed the public they would not revalue. But the capital and trade flows forced their hand, and they had to revalue.

It was on a 'bet' like this against the British Pound that George Soros made a billion Pounds almost overnight, late last century.

From the 1950s to the 1980s the Italian Lira was on a permanent slide to lower levels, reflecting Rome's profligacy. Likewise, the French Franc was the object of repeated devaluations during the 1970s. But each time a country revalued or devalued, it was thought to reflect the entire Balance of Payments position. Even then the Deutschmark got stronger and stronger while others got weaker and weaker.

The theory included the concept of the 'J-curve', which said as a currency weakened, the export product prices of a county became more competitive and exports rose. Each time a currency revalued its export, prices rose. The theory postulated that this would even out trade flows and ensure that capital stayed in the banks of weaker countries, so that one country would not attract all the capital and dominate export markets.

Then they used to be thought of as reflecting the Balance of Payments – both trade and capital – in markets that naturally found their own levels and reflected the so-called value of a currency.

Then central banks agreed that it would 'stabilize' exchange rates more effectively if they could intervene in their currencies foreign exchange markets. At least this would prevent brutal exchange rate moves. The ideal way to do this, and to restrain the more aggressive of speculators, was to intervene without warning so as to catch speculators out and deter them from hurting the nations involved.

Eventually this was just not enough as the efficient manufacturers of northern Europe made the finances of their nations strong, and the inefficient nations to the South kept getting a competitive advantage through their inefficiencies.

In 1999 in an innovative way to halt this process, "United Europe" was formed with a common currency. This was even better than a fixed exchange rate, because with one currency among 17 nations, there could be no revaluations or devaluations!

So over the next decade and more, in this revolution, the formation of the Euro was a major currency manipulation. The political aspect of the formation of the European project obscured this, but the net result was that the strong nations prevented the lifting of their currencies (as happened with the Deutschmark continually before the arrival of the Euro) because they had the same currency. This has allowed the wealth of the South, including the loans they took out, to return to Germany and other strong nations in the North. But it was a huge act of self-interest for the stronger members.

What must be pointed out is the more sophisticated methods of managing exchange rates, as used by the Fed and the ECB, who currently use 'swaps' – borrowing each other's currencies for use in 'adjusting' exchange rates. This has removed any brutal moves in exchange rates so far, holding the Euro to Dollar exchange rate between $1.20 and $1.40 over the last few years.

But the most recent action in the exchange-rate revolution has come from Switzerland and Japan. It was natural that wealth sought a place to hide protected from a loss of value. Safe-haven currencies were sought and as they had such strong Balance of Payments, Japan and Switzerland became the targets. That is until the last two years, at which time they too decided that it was expedient to force their currencies lower through Quantitative Easing, creating and then selling their currencies to lower their value and so protect their exports and boost their economies.

Let's be clear – these two governments and their central banks embarked on programs of plain self-interest, directly weakening the exchange rates of their currencies in favor of exports.

So now there is no such thing as a 'safe-haven' currency! You can be sure that this week's statement from the G7, claiming that "market-determined exchange rates" should be pursued everywhere, will be ignored – and likely by their own members.

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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