Dollar Nonsense; Dollar Gold Nonsense
Enough is enough.
Dollar Nonsense
The dollar is not falling sharply. Yes, it is down from the beginning of the year, but it is 27% stronger against the euro than it was in February 2008, at the start of the Global Financial Crisis.
To put the recent dollar decline into perspective, the dollar is higher against the euro than it has been 64% of the time from that February 2008 low to this week. It is higher than it has been 58% of the time since the euro was created in January 1999.
While many in the market expect the dollar to collapse due to the enormous amount of deficit spending by the U.S. government and unprecedented amounts of monetary stimulus by the Federal Reserve, this has not been the case so far and is unlikely to be the case going forward either. The U.S. dollar’s status as a reserve currency and the relative weaker economic conditions of countries with competing currencies (euro, British pound, and Japanese yen) are expected to keep a floor under the value of the U.S. dollar.
In today’s monetary system there is no real alternative for the U.S. dollar: Not gold and not any other currency. No other currency or gold has the level of liquidity or depth as the U.S. dollar to be able to support the global economy. The dollar’s place in the international monetary system is likely to remain strong in the years and decades ahead. Despite all of the concerns regarding the U.S. dollar and the U.S. governments’ inability to solve its own sovereign deficit and debt issues, investors repeatedly have flocked to the dollar in times of crisis. An extremely liquid and therefore efficient market for U.S. dollars both in the United States and globally make it a preferred choice in times of crisis. Gold typically is its prime competitor in these times.
The Chinese yuan is being touted by many as the next reserve currency to replace the U.S. dollar. The Chinese government and central bank do not want this, however. The yuan is not really convertible yet, and the float is very small compared to what is needed to serve as a de facto reserve currency. Knowing that hosting the reserve currency historically has caused severe problems ultimately for France, then England, and then the United States, Chinese monetary authorities do not want to see this burden transferred to them, regardless of what western gold bugs claim.
Chinese monetary authorities, like most of their compatriots around the world, would prefer a multi-polar international currency regime. All of them are aware that for this to occur it would take several decades, massive increases in the liquidity and float of the ‘replacement’ currencies with inflationary risks for those countries, and major changes in domestic monetary regulations that prohibit private entities holding wealth denominated in foreign currencies in all but perhaps two countries in the world. For China to do this alone with the yuan would require the Chinese government to take several steps to develop a strong, liberal domestic banking system before it may allow its exchange rate to float.
While the dollar may lose value over time the longer term prognosis is that it will remain a major part of the international currency regime or system for many decades. Furthermore, economists are well aware that if the U.S. political structure were to reform in a way that allowed for proper economic policies to be implemented on a fiscal basis, the U.S. economy has enough relative strength that the dollar’s hegemony within the global monetary system could be strengthened and revived. (That said, no one is betting on those political reforms occurring in the United States.)
Dollar Gold Nonsense
Gold does not trade against the dollar per se. It trades against currencies in general. As stated above, there is a lack of good economic fundamentals to back any major currency. This has caused concerns among market participants driving them toward gold as an alternative.
While it is believed that gold always trades inversely to the dollar, there have been various periods during history that gold has often risen in line with the dollar. Both assets are viewed as safe havens and as a result are seen rising simultaneously at times, examples of such periods are 2009, 2005, the second half of 1982 through the first quarter of 1983, and late 1976 through 1977.
Gold trades opposite the dollar 34% of the time. The other 66% of the time gold either moves in the same direction as the dollar or in an uncorrelated fashion.
The Conclusion
The real question is why so many people continue to believe and pontificate that (a) the dollar is collapsing and (b) gold trades ‘against’ the dollar.
Given the lack of empirical evidence, these must be faith-based beliefs.
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