Valuing Gold In A World Awash With Dollars
by Alasdair Macleod via GoldMoney.com,
ZeroHedge.com
Sat, 07/28/2018
n this article I point to the pressures on the Fed to moderate monetary policy, but that will only affect the timing of the next cyclical credit crisis. That is going to happen anyway, triggered by the Fed or even a foreign central bank. In the very short term, a tendency to moderate monetary policy might allow the gold price to recover from its recent battering.
Unlike the last credit crisis when the dollar rose sharply in a general panic for safety, on the next crisis, the dollar is likely to fall substantially. The reason is that foreign ownership of dollar investments (typically in US Treasuries) appears greatly overextended, and an additional $4 trillion of liquidity is in the wrong (non-US) hands. This is likely to be unloaded during a general credit crisis, driving the dollar lower.
Domestically, in the next credit crisis the Fed is certain to support the banks, provide finance for a runaway government deficit and stabilise the private sector by injecting further liquidity into an economy already awash with dollars. Therefore, not only will the dollar fall on the foreign exchanges, but its purchasing power in the hands of American citizens seems certain to fall as well.
And finally, I demonstrate how fluctuations in the quantity of paper gold makes a nonsense of the conventional supply and demand approach to analysing and forecasting gold price trends. Futures and forward markets have deflected demand from physical metal, a situation that depends on confidence in the dollar as a stable currency being maintained. Only a marginal shift away from paper towards physical gold will undermine the whole paper-gold system.
The journey to the next credit crisis
Recently the gold price has depended on the dollar’s cross-border flows. They in turn have been driven by market perceptions of increasing credit risks in emerging market currencies, and the Fed’s policy of normalising interest rates while other major central banks are still applying monetary stimulus. The result has been a stronger dollar on its trade-weighted basis and a weaker gold price.
This is short-term. Long-term, there can be little doubt that the trend of a falling dollar measured in gold will continue, which has seen the dollar lose 97.5% of its purchasing power relative to gold over the last fifty years. We know this because it is official policy to maintain price inflation. While the long-term can take care of itself, we need to assess what is likely to happen in the next few years, particularly in the event of a mooted recession, and also the next credit and systemic crisis, which we know to be a periodic event.
The Rest…HERE
