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Currency Strength and Central Bank's Activity - Got Gold?

Commodities / Gold and Silver 2013 Oct 03, 2013 - 11:08 AM GMT

By: Matt_Machaj

Commodities

The crucial story for gold investors is not the pure inflation rate of the dollar, but something much deeper. When you focus on gold, you should sharpen the focus of your lens on the dollar system. As history confirms, gold can both increase and decrease under inflationary circumstances. It is also the case when considering the opposite scenario, which is deflation. It all depends on how well the dollar system is performing (how well is both dollar as a currency and dollar understood as dollar denominated assets; bonds, stocks, derivatives, credits etc.).


The easiest way to look at the dollar is to compare it as a currency against all the other currencies. This, in fact, was the best way to assess the dollar from 2002-3, when it started to lose its value against other currencies and gold began its long and spectacular upward climb. This took place while a bubble formed in dollar denominated assets, especially real estate.

In 2008 there was a radical shift. Shortage of liquidity in the financial markets lead to massive selloffs of assets in all markets, with emerging markets being hit the most. That's when the dollar got a gust of air in its sails, and increased significantly in value. Under current circumstances, the dollar - as a currency - does not appear to look that bad. Even when compared to other strong currencies the dollar looks firm. The central bankers who print the British pound and the Japanese yen seem to be devaluation devotees and the euro is still recoiling from the turmoil of numerous internal problems.

Therefore, when looking purely at the currency markets, the dollar does not appear as endangered as it may seem. However, as we hinted at the beginning, this is not the whole story. We have to assess not only the dollar against other currencies, but the entire dollar system, that is dollar denominated assets. The dollar may be a better investment than the British pound, but the big question is whether gold may be an even better investment than the dollar even when it outperforms the pound.

So how is the dollar system performing internally? One of many possible things to focus on is the interventionist policy of the government, especially the central bank. This can tell us how firmly the economy stands.

In the recent years we witnessed tremendous expansion in the Fed's activity. Since it all comes down to money creation (supplied for financial papers and bonds), this influence is rather negative for the whole dollar system. This means that from the economic point of view, the outlook for gold is quite favorable for the coming years.

Thank you.

 

Thank you.

 

Matt Machaj, PhD

Sunshine Profits‘ Contributing Author

Gold Market Overview at SunshineProfits.com

* * * * *

Disclaimer

All essays, research and information found above represent analyses and opinions of Matt Machaj, PhD and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matt Machaj, PhD and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Matt Machaj, PhD is not a Registered Securities Advisor. By reading Matt Machaj’s, PhD reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Matt Machaj, PhD, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


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