The yen and gold 

Sep 15th 2010, 12:16 by Buttonwood 

THE Japanese have intervened today to drive down the yen, for the first time since 2004, and have had some initial success. Of course, the Swiss have also made various attempts to drive down the franc but their currency is now at parity against the dollar, having been 1.16/$ in June. To rewrite Mrs Thatcher: “You can buck the market but maybe not for very long.”  

As David Bloom of HSBC points out in a note responding to the move, the costs of intervention to the Japanese are not great. Selling yen and buying dollars results in more yen being created, which might be inflationary, but a bit of Japanese inflation wouild be a good thing.  

My thought concerns the general tendency of countries to want their currencies to depreciate. Everyone would like to boost their growth by letting their currencies slide and increasing exports. Of course, not all can succeed. Someone must increase net imports and let their currency appreciate. The obvious candidate is the Chinese, but they are unwilling to let it happen (at least at a pace desired by the rest of the world).  

The result is like a game of deflationary pass the parcel in which the countries with appreciating currencies eventually feel the pressure, and try to reverse the trend.  

I have stuggled to explain why gold is doing so well (it reached a new nominal high yesterday) when Treasury bond yields are so low (one asset is an inflation hedge, the other is devastated by rising prices). But perhaps the answer is simple. Investors round the globe know that authorities would like to drive down their paper currencies. They don’t know which will succeeed. But just in case the authorities in their own country are the ones who manage to win the race, they are buying some gold as a hedge.