The Daily Market Report: Gold Surges Higher Again Amid Heightened Safe-Haven Demand

12-Aug (USAGOLD) — Gold extended to the upside on Wednesday to new 3-week highs. The yellow metal is being spurred higher by heightened safe-haven demand after China devalued the yuan yet again.

The PBoC assured us after Tuesday’s 1.9% devaluation that it was a “one-off depreciation,” today they debased the yuan by an additional 1.6%. Color me shocked that a highly respected central bank would outright lie to global investors . . .

The concern of course is that these were just the initial volleys in some new escalation of the currency wars, that China’s intent is to further debase the yuan to reinvigorate flagging demand for its exports by making them cheaper.

Obviously this exacerbates global deflationary pressures, in a world where the Fed (and others) is trying to stoke domestic inflation by exporting its own deflation. That leaves the Fed little room to protest the Chinese move, clearly illustrating that there are no real winners in a competitive devaluation (i.e. currency war) scenario.

Nixon-era Treasury Secretary John Connolly once famously told a group of European finance minister that the dollar “is our currency, but your problem.” The PBoC appears to be throwing that back in our face: The yuan is their currency, but it certainly has the potential to become our problem. A problem that is only going to get bigger as China becomes more of an economic powerhouse. They have our playbook.

Chinese investors have been burned by extreme volatility in their stock market and now they face an orchestrated debasement of their currency as well. They are turning to the classic safe-haven investment, gold. With U.S. shares getting pummeled again and the dollar index tumbling to 5-week lows, American investors should take heed as well.

The dollar is falling because investors are increasingly convinced that the latest market turmoil being driven by China, effectively takes the September rate hike off the table. You frequent readers of this page know that I never thought September was really on the table. The unwinding of Fed tightening expectations is the counter-balance to upward pressure on the dollar being driven by yuan devaluation.

Jim Rickards said this morning that the “Problem with being the last guy standing is there’s nothing left to devalue against except gold.” If the U.S. returns fire in the currency war, it very well may prove to be extremely bullish for gold.