The US dollar, rather like the world’s stock markets, is hanging in there in a state of suspended animation that surely cannot continue. Gold’s strength stands out as a clear indicator that a lot of people look at all fiat money with a jaundiced eye – and why not? As measured one to the other, currencies vacillate: sometimes strong, sometimes weak, driven in the short term by factors such as future interest rates and inflation perceptions.
Gold and other currencies: turning point for the dollar
However the price of anything is in the final analysis determined by supply and demand. If there were 100,000 genuine Picassos, the average price for a Picasso would be a lot lower than is the case. If all central banks are willing to inflate their money supply, why should the value of one against the other change much? But it’s only commonsense that their value must collectively fall – but against what? Gold, of course!
We consider it perfectly appropriate to talk about gold as both a currency and a commodity because gold uniquely is both of these. It is not surprising that its importance has grown considerably at a time of an ‘unprecedented debt culture’ and worldwide inflated money supply.
Since January 2002, the dollar has long-term been out of favour, but since the end of 2004, short-term in favour. Either this is the turning point for the dollar, which hardly seems likely given their current account deficit, or it is a temporary cessation of its weakening action.
Gold and other currencies: rate differentials
It is inevitable that interest rate differentials will narrow over the coming period. The US Fed are close to pausing if not easing. The Bank of Japan gas ended its Zero Interest Rate Policy (ZIRP). When recently the ECB chose to hold interest rates unchanged, Jean-Claude Trichet, the ECB President, surprised the market by saying that another meeting would take place on 3rd August. This was considered an exceptional step and a certain signal of an interest rate increase. The currency story should get very exciting on reactions to these interest rate announcements as they occur.
Central to the dollar story is America’s current account deficit, which GaveKal also recently commented upon, making the point that since 1998 it has grown from 2% of GDP to 7% of GDP. In their opinion, it would have to triple to 20% of GDP over the next five to seven years to sustain the growth in foreign official dollar reserves (global liquidity and economic growth around the world). If the stimulative effect of a declining US savings rate is to be maintained, it will eventually have to be at about minus 10%. The world is truly crazy; the asylum is in the hands of the patients.
To conclude, a year from now we expect the dollar to be much lower, the euro and the yen to be much higher, the pound somewhere in the middle and gold, top of the pile.
By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit https://www.rhasset.co.uk/
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