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Just take a look at the chart of the U.S. dollar
Index and you see a frightening sight. If it sinks any further its
support will have evaporated.
We have watched all this week the gold price rise and look good in the
dollar. But in the euro it
has barely moved. Against
the Swiss Franc the dollar looks so weak. With the Technical picture
looking so poor, one turns to the fundamentals to see if they conflict or
support a downturn for the dollar.
The U.S. dollar Fundamentals
Can government govern finances?
The United
States, right now, is on the brink of having used up all its legislated
credit capacity. At $14.3
trillion there is a desperate need for a higher credit limit. Unless, by Friday, they have
passed legislation to raise this, the government cannot issue checks or pay
staff. Yes, they can use
various tricks to delay this to accommodate political brinkmanship, but the
outside world will be alarmed that the government is unable to tend to such
basics or allows politics to overrule finances. Here there is a clash of
systems, the need for financial correctness against the games politicians play. With President Obama’s
administration without sufficient power to legislate as they want at a
critical time when government should be strong, there is little to inspire
confidence in the U.S. government.
Global confidence in the U.S. dollar will be shaken if such a
financial mess were to happen.
We would most likely see the ratings agencies downgrade U.S. debt
before that happens. From
outside it looks as though the U.S. is oblivious to foreign investor’s
opinions at a time when the U.S. is reliant on foreign investors buying U.S.
debt.
Moving down
the ladder we have seen so much in the press that individual States are on
the brink of bankruptcy and some already there and little seems to be being
done to rectify matters to date.
Or should foreigners just presume that the Fed will rescue them with
bailouts? If that is to be
the path followed that again will undermine foreign investors confidence in the dollar.
What needs to
be understood is that government finances at all levels have to be sound to
inspire confidence? It
seems to be a simple obvious statement, so why is it not being applied? Even Fed Chairman Mr. Ben
Bernanke is calling for government to sort out the Federal deficit but all we
see is a partisan battle that seems oblivious to their countries crying
needs. Or do we
misunderstand the scene.
Are politics more important than good order? Today saw the revelation that
China owns more than $360 billion of Treasuries than was thought to be the
case. Does the government
not worry about this dependence?
Or does the government want to ensure that the dollar weakens? This is a strong impression
pervading so many foreign exchanges now.
And the
inflation coming from the food and energy worlds is globally pervasive and
capable of threatening what little economic growth there is in the developed
world. It will affect many, many
countries and could reach into the U.S.A. We do expect the U.K to
experience a shrinking of its GDP in the first quarter of 2011 announcing the
arrival of a double-dip recession, so shrinking growth could also affect the
U.S. still with its lackluster economy. What will this somewhat emasculated government do then?
The Trade Deficit
For so many
years now the U.S. has run a Trade deficit balanced by a surplus on the
Capital account. This
inflow of capital is the flow of power from the U.S. to foreign
creditors. Already we are
seeing a tendency to try to diversify away from the U.S. dollar. If this trend gathers momentum
then the overall picture on the Balance of Payments could sink to a
deficit. How close is it
now? Or is it happening as
foreign investors diversify into other currencies to stave off or reduce the
impact on their surpluses of a falling dollar and overweight natures of their
dollar holdings. It’s
bound to happen if only because of prudence. And yet the U.S. is doing
nothing to address the situation, why not? We see that the main beneficiary
of a weak dollar would be the U.S. on the trade front as well as on the debt
front. So one question that needs
an answer is, does the U.S. government want a weak
dollar? Or is the U.S.
government unconcerned at the U.S. dollar’s exchange rate.
Inevitable weakness
It seems that
Europe and other nations are more worried about the U.S. dollar exchange rate
than the U.S. is. This
laissez-faire attitude appears to confirm that the U.S. has no intention of
protecting the U.S. dollar’s exchange rate. For that reason we have to
conclude that the U.S. dollar is inevitably headed to more weakness. In the past the ‘top dog’
nature of the U.S. currency meant that the rest of the world had to suck it
up. Now, it’s only a
matter of time before the U.S. is second to China’s economy in the
world. By 202 the Chinese
economy will have doubled and we have no doubt that the Yuan will be the
world’s ‘top dog’ currency, eclipsing the dollar. When that happens and it may be
well before 2020, the dollar like all other global currencies will have to
pay its own bills with goods not simply freshly printed dollars.
The $ and the € Gold Price
Is it any
wonder then that the gold price is rising in the
U.S. dollar. The euro is,
the Swiss Franc, the Pound and other currencies are rising in the dollar
too. It’s not the
gold price rising in the dollar it’s the dollar falling in terms of
gold. Likewise other
currencies are not rising against the dollar, the
dollar is falling against them.
To get a
clearer picture of what is really happening in the gold price one has to look
at the gold price in the euro or the Swiss Franc. That will reflect demand and supply
better. We have and will
see the gold price rise in the euro for fundamental reasons but for
accuracy’s sake we have to relegate the dollar price of gold to second
or third place, because that’s more about the dollar than about gold.
Gold as part of the global monetary system
Today we read
that the shareholders of the Bank of Italy, the Italian banks want to use the
gold held by the central bank to shore up their balance sheets. The Bank of
Italy has gold reserves of 2451.8 metric tonnes
(68.6% of their foreign exchange reserves) at the moment. As shareholders assets, by
including these reserves at market value, Italian banks look a lot
healthier. Yes, this is a
touch of ‘cooking’ the books, but it recognizes the fact that
gold has a monetary value, recognized in the monetary world. In inter-nation currency
transactions gold is being used to secure loans. It has a de facto role in the
monetary system that is getting harder and harder to avoid.
Could gold be confiscated?
Of course gold
will never be confiscated for the same reasons it was in 1933 [money supply
expansion]. Its role today
can be as collateral for international transactions, as we see it being used
now. In a global world it
is the only real monetary asset that bypasses nations to be global money that
is truly mobile. Should a
nation find itself in trouble, much like these Italian banks, then gold sits
there waiting to shore up balance sheets and serve as collateral for
international currency swaps for nations with questionable
creditworthiness. Will the
dollar fall into that category once the Yuan is a truly international
currency? Certainly holding
gold will bypass that eventuality.
Even in the hands of the U.S. government its citizen’s gold
could give the dollar a golden hue.
In China it is
understood by all that all assets of the nation including citizen’s
gold is the property of the state.
In the U.S. citizens are allowed the privilege of owning gold and don’t
have the right. How
small a step to confiscating the huge tonnage of citizen’s gold
wherever it is.
Julian D. W. Phillips
Gold/Silver
Forecaster – Global Watch
GoldForecaster.com
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