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US$, Gold, and the international monetary system

Aug 18th, 2016 No comments

The gold standard era came to an end in 1913 with the creation of the US Federal Reserve, although after that there were still pseudo structures to base value on some kind of link to gold. It was the beginning of the era of fiat currency which developed treacherously through the period until 1971, which is celebrated this week when President Richard Nixon terminated the US$ convertibility to gold, 45 years ago on 15th August; effectively de-linking the US$ from gold. He exclaimed famously “Your dollar will be worth just as much tomorrow as it is today… ” as he created the totally fiat (paper based) end of the Gold Standard. This was the seminal moment in international monetary system history which led to the global financial crisis we endure today with all it’s crucial and threatening elements in unsustainable debt levels, low and negative interest rates, anaemic growth rates, leading no doubt to terminal need for change.

In effect what Richard Nixon achieved was not de-linking the US$ from gold, but rather de-linking gold from the US$. Since 1971 gold has increased in value from $35 an ounce to $1350, and the US Dollar has depreciated by a similar inverse percentage (97%).

The period between 1913 and 1971

During this time volatility crept increasingly into the markets and we witnessed higher highs and lower lows, remembered for the ‘dizziness’ of the 1929 US equity peak and the desperation of the 1932 great depression, as the relationship between paper (represented by the Dow Jones Industrial Index) and gold began to fluctuate wildly, as evidenced in the Dow / Gold ratio. During this time gold was fixed at $20.67 until increased in 1931 to $35, representing a US$ depreciation of 69%.

The period from 1971 until today

This has been characterised by the Dow / Gold ratio dropping to a low of 1.0 in 1980 with both the Dow and gold at 800, and thereafter increasing to a high of 45 in 2000 with the Dow at 11250 and gold at 250. This massive increase in volatility is continuing with the Dow / Gold ratio now en-route lower to a yet lower low point such as <1.0 in the next period, with stock and bond markets threateningly vulnerable and gold in it’s next 8 year up cycle.

Value of the US Dollar and its reign as the world reserve currency

The US$ is losing value, as indeed are all paper currencies, and this process is amplified by the actions of central banks.

US$ Purchasingsmall

Fiat currency (all currency) is declared by government proclamation to be legal tender, and depends on trust and confidence for perceived value. These values are beset by trials and tribulations, including horrific treatment such as QE and negative interest rates, amongst others, and maintain perceived and accepted value despite obvious devaluation to core value. Such perceived value remains exposed to massive collapse as reality sets in.

The world is changing fast and the financial power blocks are shifting, probably from west to east. China and Russia combined are buying gold bullion at the rate of world gold production, and America even refuses to undertake an audit of US gold reserves. Combined with the vulnerable state of world stock and bond markets, this truly presents a toxic cocktail, and the banking system is showing signs of another crisis (or collapse).

Even the US reign as holder of the international reserve currency of the world could be threatened in due course. as these dominant periods only seem to last an average of 94 years. Consider the diagram below.

Reserve currencysmall

We are at that moment in time with:

  • potential global financial crisis;
  • collapse of the international monetary system, and introduction of a new one;
  • massive international currency devaluation against gold;
Categories: Currency, Gold Tags:

Peculiar prospects for the US$

Aug 12th, 2016 No comments

Background

Brexit has been one of the most positive events in the world for a long time, and regretfully, the opportunity has been lost. The world is in ‘stagflation’ and the remedy, as at the beginning of the 1970’s, is to:

  • Increase interest rates to re-establish the concept of ‘saving’ which in turn will generate demand to start growing economies again;
  • Increase privatisation and reduce the involvement of central government;
  • Reduce tax rates to generate growth via increased investment;

This is the opposite of what the EU is doing, and was the opportunity for Britain in leaving the EU: It is the ‘medicine’ you need to take to re-energise economies for growth, but it is politically untenable and what the world is not doing. In Britain the opportunity was even greater because there is no political opposition to the Conservatives at the moment with Labour in tatters and seemingly intent on further self-destruction. More countries are likely to exit the EU.

But, sadly, the UK has ignored this path and chosen to introduce stimulus and reduce interest rates. It too will now join the rest of the first world in building debt via QE and keeping it’s growth rate anaemic. This is all in line with the original ‘Reaganomics’ policies in the US which was the original start of the problems the world faces today, and which still needs to be addressed.

It is this extended process of endless and unsuccessful easing and stimulus that has eroded confidence in the international monetary system and the central bank operations which has left all currencies significantly overvalued. This is essentially the driving force of the current bull market in Gold, which will reduce inflated currencies toward their real core values.

The US$

US Dollar value is the result of many impacting factors, which could be distilled down to a manageable few in order to try and attempt understanding where Dollar value might potentially drift in the period ahead.

As with most things financial the US$ direction will essentially be determined by 3 broad impact factors in Supply and demand, Human emotion, and Technical analysis.

These factors plus all the competing external factors, such as the health (or otherwise) of trading nations and their respective currency values, provide clues to the actual and potential value of the US$. But it can only remain clues and never be objective nor accurate.

The main driving force will mostly always remain the inverse relationship the US$ has with other currencies and the gold price.

The US$ is traded against all world currencies but is valued mostly by performance against it’s largest trading partners and their respective currencies. This is reflected in the US Dollar Index which consists of the largest 6, including:

  • Euro 57.6%;
  • Japanese Yen 13.6%;
  • UK Pound 11.9%;
  • Canadian Dollar 9.1%;
  • Swedish Krone 4.2%;
  • Swiss Franc 3.6%;

The US Dollar Index started in 1973 at a base value of 100 and it’s performance since is illustrated in the chart below.

USDsmall

The index enjoyed peaks in Jan 1985, Jul 2001, and Jan 2015 in a steadily declining trend, but has more recently recovered from low points in Feb 2008 and Mar 2011 in a steadily rising trend during the last 8 years. This last 8 year period has also seen a steady decline in the Euro vs US$ currency pair, illustrated in the chart below.

Eurusdsmall

The Euro constitutes 57.6% of the US$ Index and therefore the two correlate inversely, with the Euro being the primary force propelling the US$. This strongly suggests further upward moves in the US$ and downward moves in the Euro, especially when you additionally consider the travails in the EU:

  • The EU is on a path to eventual collapse;
  • More countries will follow Britain in leaving the EU;
  • A banking crisis is developing;
  • Stagflation is coming, if not here already;
  • Migration crisis plus increasing terrorism;
  • The EU plus Japan constitute 99% of the world’s QE at the moment;
  • Plus all the travails of central bank mismanagement resulting in:
    • Low to negative interest rates;
    • Anaemic economic growth;
    • Plus many others;

This will of course lead to the eventual collapse of the Euro and a massive increase in the value of the Dollar with a flood of Euros into the US$.

 

Conclusion

 

All currencies are over-valued after the lengthiest period of monetary easing in history which continues unabated in central bank activity which is not working. Confidence in the international monetary system is eroding as economic recovery remains elusive in low growth rates, high debt levels, and low interest rates, and this is the primary cause of the new bull market in gold. Stock market indices worldwide exhibit massive extended top patterns and the bond markets are at historic low yields, all threatening impending collapse.

In the next indefinite period in this environment:

  • Currency values including US$ will be reduced from their inflated levels down toward their true core values;
  • Events in the EU will cause massive reduction in the value of the Euro and increase in the value of the US Dollar;
Categories: Currency Tags:

Gold update

Aug 1st, 2016 No comments

The gold price moves in cycles of approximately 8 years which can be broken down into 6 month cycles which include much smaller cycles of approximately 1 month each, give or take a week or two. The gold price bottomed in Dec 2015 at the 8 year cycle low, heralding the start of the new bull market which should take us to 2023-2024 to complete the 8 year cycle.

The gold price increase since Dec 2015 has completed the first 6 month cycle (Jun 2016) and has also completed the first 2 monthly cycles in the second 6 month cycle. It has now just started the 3rd monthly cycle which should take the gold price up to finally reach the mid-term low point of the second 6 month cycle. Observe the gold cycle chart below.

Gold cyclessmall

There has been a great deal of market development this past week in key areas. which all impact the gold price:

  • US economy only grew 1.2% p.a. in the 2nd quarter (against forecast 2.6%);
  • Japan’s much publicised stimulus program turned out to be only puny which destabilised the currency markets;
  • US$ dropped markedly against this toxic cocktail, confirming no Fed interest rate hike any time soon;

This, together with the on-going collection of other impacting factors has pushed the gold price into this bullish position:

  • Anaemic global economies and threat of deflation;
  • Interest rates moving into negative territory;
  • Unsustainable global debt;
  • Indications that the stimulus programs are not working;
  • Increased loss of confidence in the current monetary system;
  • Precarious position of global equity and bond markets;
  • Banking crisis gathering momentum especially in the EU;
  • Fallout from BREXIT (UK recession);
  • Oil now moving into a bear market again due to supply glut;

All this plus continued central bank easing continues to devalue the real value of currencies which continue to remain inflated. This imbalance can only be corrected with much higher gold prices.

Technical analysis indicates precious metal prices will continue to rise, and this is supported by the many traditional ratios used to evaluate direction:

  • Dow / Gold price ratio (Decrease indicates higher gold price;
  • Gold / Silver price ratio (Decrease indicates higher gold price;

Consider the Dow / Gold ratio below. This is in steady decline indicating a continued increase in the gold price.

DowGoldratiosmall

Now consider the Gold / Silver ratio below. This is in rapid decline since March 2016 indicating silver is now leading gold in the rate of increase which in turn indicates continued increase in the gold price.

DowGoldratiosmall

All the indications are appropriate for the gold price to increase as the price moves well into the next 8 year cycle.

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