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Currency Wars Will Boost Gold in Q1

Warren Buffett famously has said that aliens would be “scratching their heads” at the human affinity to gold and gold investments, and sees the asset as little more than a speculative commodity — not a long-term investment.

I largely agree. But it just so happens that recent conditions could favor a quick pop in the precious metal.

So the time may be right for pure-play gold investments like the SPDR Gold Trust (NYSE:GLD) or the iShares Gold Trust (NYSE:IAU), or perhaps even miners like Barrick Gold (NYSE:ABX) or the broad-based Market Vectors Gold Miners ETF (NYSE:GDX).

Why? Because the headlines and macro news seem to be saying so.

No, I’m not talking about the news that Germany will repatriate some $36 billion in gold over the next decade from vaults in Paris and New York — though lots of fun conspiracy theories can be spun from that headline.

I’m talking more about headlines that relate to currency. Or more particularly, the threats of a “currency war.”

Simply put, a weak currency is a great thing to have right now. That’s because it allows countries to export their home-grown goods more easily and makes other nations’ products less attractive. The most clear example of this is China, which has long kept its currency artificially low to remain competitive. Remember Mitt Romney’s “currency manipulator” claims during the presidential election?

Emerging markets have long been creative with keeping their currencies weak as a way to boost economic growth. Research from RBS shows that some of the nations most committed and capable to fuel a race to the bottom include Thailand, Malaysia and Chile.

But it seems developed economies are getting in on the act. Sweden also makes the list as Europe continues to struggle along. Russia is pretty high up the list, too.

Thus the headlines about a global “currency war” to see who can win an export edge.

Some of the battles being fought are intentional. Take recent central bank policies in Japan that have weakened the yen in an effort to boost the economy. Japan’s trade balance turned negative early in 2012 and got worse as the year dragged on. So a loosening of monetary policy to ease back the yen could prop up exports and the economy as a whole.

But other weak-currency stories are not intentional. Last year, German stocks gained momentum thanks in part to a weak euro. Germany didn’t artificially weaken the EU currency, of course — a debt crisis was clearly to blame — but it’s hard to argue against the lift Germany got as a result. Now those benefits are waning as the euro is challenging a 10-month high. In fact, Citigroup (NYSE:C) recently put out a research note stating, “European politicians are increasingly worried about the effect of a strong euro on an already weak euro area economy.” But whether the EU is willing or capable of pushing the euro down is different than allowing market forces to do their own work.

And of course, we have America, which could see currency weakness if the yahoos in Congress fail to get their act together to avoid a default related to the debt ceiling debacle.

The bottom line is that the forex scene is very fluid right now mostly because many nations are looking at the prospect of weaker currencies. Thus it’s natural to see a move into gold among institutional investors, sovereign wealth funds and even retail investors concerned with capital preservation.

It won’t last forever because the global currency scene can be a zero-sum game. If the euro weakens drastically, it could prop up the U.S. dollar simply by virtue of being the “least bad” alternative.

You also can’t discount the risk of a rising dollar. Remember, gold is priced in U.S. dollars, so a rise in the greenback can naturally hold back all commodities, from gold to crude oil to grains. And we remain the world’s safe-haven currency, for better or worse, so there’s a chance this race to the bottom could result in an influx of buyers for Treasuries despite our current mess in Washington.

However, I think the risk is worth taking, and I recently put on a position in the SPDR Gold Trust myself, with a cost basis of $160 and a target of $175 that I hope will be hit in the next six weeks or so. Considering the uncertainty out there and recent support in the charts for gold prices, I think a quick pop in Q1 is likely for the precious metal.

To me, gold is never a long-term play and is merely a speculative asset class. Furthermore, I find a lot of the doom-and-gloom stuff associated with gold tiresome. I rarely dabble in it, but it seems to me that conditions are right for a swing trade.

We shall see.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he held a position in GLD.

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