Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
MUST WATCH Before You Waste Money on Buying A New PC Computer System - 27th Nov 20
Gold: Insurance for Prudent Investors, Precious Metals Reduce Risk & Preserve Wealth - 27th Nov 20
How To Spot The End Of An Excess Market Trend Phase - 27th Nov 20
Snow Falling Effect Christmas Lights Outdoor Projector Amazon Review - 27th Nov 20
4 Reasons Why You Shouldn't Put off Your Roof Repairs - 27th Nov 20
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20
THE STOCK MARKET BIG PICTURE - Video - 19th Nov 20
Reasons why Bitcoin is Treading at it's Highest Level Since 2017 and a Warning - 19th Nov 20
Media Celebrates after Trump’s Pro-Gold Fed Nominee Gets Blocked - 19th Nov 20
DJIA Short-term Stock Market Technical Trend Analysis - 19th Nov 20
Demoncracy Ushers in the Flu World Order How to Survive and Profit From What Is Coming - 19th Nov 20
US Bond Market: "When Investors Should Worry" - 18th Nov 20
Gold Remains the Best Pandemic Insurance - 18th Nov 20
GPU Fan Not Spinning FIX - How to Easily Extend the Life of Your Gaming PC System - 18th Nov 20
Dow Jones E-Mini Futures Tag 30k Twice – Setting Up Stock Market Double Top - 18th Nov 20
Edge Computing Is Leading the Next Great Tech Revolution - 18th Nov 20
This Chart Signals When Gold Stocks Will Explode - 17th Nov 20
Gold Price Momentous ally From 2000 Compared To SPY Stock Market and Nasdaq - 17th Nov 20
Creating Marketing Campaigns Using the Freedom of Information Act - 17th Nov 20
ILLEGITIMATE PRESIDENT - 17th Nov 20
Stock Market Uptrend in Process - 17th Nov 20
How My Friend Made $128,000 Investing in Stocks Without Knowing It - 16th Nov 20
Free-spending Biden and/or continued Fed stimulus will hike Gold prices - 16th Nov 20
Top Cheap Budgie Toys - Every Budgie Owner Should Have These Safe Bird Toys! - 16th Nov 20
Line Up For Your Jab to get your Covaids Freedom Pass and a 5% Work From Home Tax - 16th Nov 20
You May Have Overlooked These “Sleeper” Precious Metals - 16th Nov 20
Demystifying interesting facts about online Casinos - 16th Nov 20
What's Ahead for the Gold Market? - 15th Nov 20
Gold’s Momentous Rally From 2000 Compared To Stock Market SPY & QQQ - 15th Nov 20
Overclockers UK Quality of Custom Gaming System Build - OEM Windows Sticker? - 15th Nov 20
UK GCSE Exams 2021 CANCELLED! Grades Based on Mock Exams and Teacher Assessments - 15th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Gold, the Dollar and the Failure of Currencies

Commodities / Gold and Silver 2011 Aug 25, 2011 - 02:28 AM GMT

By: Julian_DW_Phillips

Commodities

Best Financial Markets Analysis ArticleThe U.S. Fed and Congress want to see a far weaker dollar against all other currencies but can't see it because of the structure of the currency system!

In the last two weeks we have seen the strongest and most respected currencies being purposely weakened by their own central banks. It is at times like these, when the going gets tough that national monetary priorities are fully exposed. There are major dangers in these policies because of the role that currencies have played since gold was written out of the monetary system in the early seventies. Then the role of currencies was broadened to include: -


  • Being used to engineer growth or curb growth in national economies.
  • Being used to engineer price stability.
  • Being used to measure the value of assets.
  • Being used to develop a global economy and money system.

What's going wrong?

These roles conflict with each other!

The system has worked to date because the world has seen growth from the early 1980's to 2007 and hardly any strain was felt during those years. But a system is always tested under pressure and pressure we have had since 2007 when the 'credit crunch' hit hard.

Like an individual, if a nation has too much debt the value of his financial commitments must fall as his ability to repay comes into question. If his income drops, then his creditors have cause for worry. If his potential for increasing that income is undermined by competition then doubts grow as to his future competence. If he has issued IOU's far and wide and it becomes clear that these may not have the value they were deemed to have, then worries rise about the future of his business.

Now add to the above that all other businesses rely on his business and behavior for their own success and reputation and one can appreciate the dangers the entire system faces. If his success and performance is the arbiter of his and all other business's value then one has good reason to question the future and value of the entire monetary system.

The System's Foundation

For forty years now the U.S. its economy and its currency have been the bedrock on which the developed world has built itself until today. Since Nixon cut the link between gold and the dollar, currencies have depended solely on the state of the U.S. and its economy. Amazingly, in 1971 all the developed world went along with the U.S. and cut their own links with gold, preferring to rely on the U.S. dollar as the final measure of value. All currencies operated with reference to the dollar and still do, so none can operate independently now.

In times of currency turmoil investors have been inclined to move from the dollar into 'alternative' currencies whose Balance of Payments was stronger, giving the currency a seeming measure of independence and value. And this worked, provided the pressures on the dollar and alternative currency were not too heavy. "Hot money," [the Carry Trade] which allowed investors to borrow cheap and lend at higher interest rates was never so heavy as to threaten the economy of the borrower or the exchange rate of a nation.

The system worked well for forty years and the world grew richer by the day, with development spreading far and wide. But all was dependent on the dollar, which in turn was dependent on the U.S. economy, which in turn relied on the dollars in the national and global economies. And today the dollar remains the lifeblood of the world's monetary system.

The Breakdown of currencies and the dollar

Even when the pressure started to hit, there was always a refuge currency to run to, to get value, such as the Deutschmark or the Swiss Franc or the Yen. But then came 2007 and a huge rock was thrown into the pool of calm, growth and stability. First, the dollar started to sag as its financial excesses began to reap their crop. The euro became the reference currency for the dollar and looked like it would rise to $1.70 at one point, but it only made it to $1.50 before its own woes became apparent. The monetary authorities on both sides of the Atlantic then realized that the rate between the euro and the dollar was the fulcrum of the entire currency system worldwide. This exchange rate had to be kept stable at all costs. With the banking system needing intensive care on both sides of the Atlantic, floods of newly printed money appeared through quantitative easing, currency swaps and other money creation techniques. It became clear that despite inflation being apparently contained, dark deflationary forces were at work to balance the money system and again give the appearance of stability. But everybody realized that currencies were failing in their task of providing measures of value. The economic, banking and debt catastrophes gave clear evidence that a breakdown was taking place in the monetary and currency system, at first focused on the U.S. dollar, then the euro joined in the fray.

Because of the interdependence of currencies a new phenomenon appeared. It started with China 'pegging' its currency to the U.S. dollar at a rate that gave it a huge trade advantage globally, on top of the cheapest skilled wage levels in the world. But then other nations, realizing the importance of exchange rates in international trade, weakened their currencies in line with the falling value of the dollar. Those nations that still focused on curbing inflation at home, soon found their exchange rates soaring, destroying their export profitability in the process.

Again, all seemed to be coping with the new 'race to the bottom' of the currency value chain. That is until the latest bout of Eurozone debt crises. Then the Swiss Franc and the Yen became the ultimate targets for those seeking to hold onto the value of currencies. The Bank of Japan, already fighting the effects of the tsunami and the Swiss National Bank, saw their currencies rise to the point where their economies were threatened. They had to follow the rest of the world and debase their currencies, through exchange rate intervention and quantitative easing, which they did. Yes, they are struggling to do this with the Japanese needing a Yen at 80 to 85 to the dollar [currently at 76.57 to the dollar] and the Swiss needing 0.80 Swiss Francs to $1 [currently at 0.7891].

The result

Is there a currency left where one can keep one's wealth? Is there any one currency that will hold its value against assets, not just in the short-term but for a long, long time? No, those days have now gone! The currency system is now incapable of measuring strength or weakness or value through exchange rates, anymore.

The currency system has been defeated!

Oh, the system is still working. After all, where else can business and banks go? But the search for an alternative value retainer was over a long time ago. Since the turn of the century and since 2005 both gold and silver [two years ahead of the credit crunch] have been reflecting the falling value of currencies. Perhaps one thought that oil would do the job too, but that 'spiked' to $145, fell to $35 and then rose again to $100. Clearly, producers can manage the price of that commodity too.

The concept of value has now been lost almost entirely by paper money, with nothing standing surety behind currencies –which are simply government promises to pay more paper. Gold and silver have reflected value in the last decade. It looks so much like they have risen in price astronomically but have they really? Yes, their markets have grown into global markets and attracted demand never seen before, but every investor has believed that both gold and silver would and will hold value in the future. From $275 to the current peak of $1,900 is a nearly sevenfold rise and more is expected. Investors have to ask themselves has gold risen or have currencies fallen? The answer will pave the way of their success or failure.

Will gold fall now or rise further?

Perhaps we should ask instead, "Will currencies rise now or fall further?" A glance only, at the problems facing nations, their money and their economies does not inspire confidence. Instead, we feel a sinking feeling when we look forward. Is a recession setting in again? If so, it is on the back of a considerably weakened system no longer able to bear the blows it suffered when the credit crunch first hit. Are governments able to resolve the developed world debt crises? Can they make the banking system healthy and begin lending profusely? Can economic growth be restored to the point where consumer confidence is resuscitated? By this we mean, as the employee said to the employer, "if you want confidence back to former levels, where you retrenched one employee, you must employ two more."

It doesn't look like it does it? So, is there a good reason why one should get out of the gold and silver markets?

Is there a good reason why they should stop rising? Have currencies stopped falling? As you know, our target is $2,090 and we are just about to enter the 'gold season'. When we gave you that target, it was the first price at which we expected a consolidation and perhaps a correction. Then we would look at the picture again and revise our targets. This does not mean that we believe that is a peak. We will only know that when we are there.

In these markets with central banks picking up gold as it appears on the market, the corrections are shallow. Once demand reappears, it has to push prices up to get the metal. Any attempt to chase prices too high see emerging market demand evaporate, as we have seen this week. Then the price pulls back to the level of the last London Fixing, where it pauses before the next move up. Physical demand remains professional, but robust and happy to see prices rise. Central banks for one have no illusions about what is happening to currencies. They see the need to build stocks of gold for themselves. These are not the actions of speculators but hardened monetary professionals who do appreciate real value. If they are continuing to buy, what should you be doing?

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2011 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules