U.S. Dollar Strength and Implications for Gold 39 comments
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As competitive currency devaluation looms, the USD may gain on a relative basis. The black swan remains the possibility of a loss of confidence in the U.S dollar.
Continued Artificial USD Strength
Human beings have the bad habit of valuing things on a relative basis. Absolute value is very hard to comprehend. The recent USD strength has been a factor of weakness in foreign currencies and NOT strong fundamentals for the USD. This was highlighted Tuesday when both Gold and the USD rallied on the back of Euro weakness. Allow me to highlight several fundamentals that are developing:
1) The Euro is being tested. The idea of a unified currency has always troubled me, it seemed to be more of an experiment than a logical conclusion. To be more specific, it is not the idea of a unified currency that is troubling, but rather the idea that countries with independent fiscal policies are all tied to the same monetary system. It was only a matter of time until disparities emerged in the various member countries with respect to inflation expectations and output trends. The unified currency reduces options for struggling economies who are forced to stimulate ONLY through the fiscal approach. That means that deficits balloon, but with a 3% of GDP limit imposed on member nations, fighting between members may quickly emerge. With more than €1 trillion in Euro-zone debt issuance expected this year, the EU is not far off from the numbers being reported out of the U.S.
2) Exporting nations currencies are feeling the pinch. This was highlighted by Gregory Weldon of Weldon Financial in a report out Tuesday. He specifically mentioned the bearish outlook for the following export reliant currencies: Korean Won, Indian Rupee, Polish Zloty, Hungarian Forint, Czech Koruna, Canadian Dollar, Chilean Peso, and the Mexican Peso. The trend over the past few years has been for the U.S to import an ever increasing dollar amount of goods and services. That resulted in selling pressure on dollars and buying pressure on exporting currencies to purchase the local goods for export. With the sharp decrease in U.S imports over the past few months, export reliant currencies have felt the sharp decrease in demand. Added to that pressure, the sharp drop in the price of crude has led to a double hit on currencies such as the Canadian dollar.
Is pressure easing on these export nations? It doesn't look like it. In fact, if we use the Baltic Dry Index as a leading indicator of global trade, the outlook is pretty dire. Consider that this Index was sitting higher than 11000 less than a year ago. Although the index appears to be stabilizing, global shipping prices are still extremely cheap, highlighting the lack of demand.
That lack of demand will likely keep U.S dollars at home and in many cases, those dollars will end up getting tied up in treasuries. As U.S consumption falls to below normal levels (normal by global standards, obviously far below U.S standards), the rate of savings in the U.S should rise as long as unemployment is kept under control. This doesn't appear to be a trend that will reverse any time soon and will likely continue to hurt export reliant countries.
Then there is of course the thousand pound gorilla in the room - that being competitive currency devaluation. This will be predominant in the exporting nations who are fooling themselves that they can increase exports by making their currency weaker, ignoring the global trend of trade deflation.
3) In comparison to, well, every other central bank in the world, the Fed is far more scrutinized. This makes currency devaluation harder and shifts the risks of currency debasement to global nations. This obviously supports the U.S dollar on a relative basis. Even other sovereign nations would rather print money and shift the funds into USD as they seek the safety and stability of the US. That being said, the USD is in and of itself weakening in my opinion - but strengthening against almost every other asset. Quite a dilemma for a trader. At some point, the Fed may be able to justify currency devaluation if everyone else is doing it. It's not a good argument, but it's an easy sell to Capitol Hill where they can easily argue that their exporters cannot compete with such a strong dollar.
Gold
I remain perplexed with regards to gold prices. On a valuation basis and discounting what the market KNOWS the Fed is doing, gold is overvalued in my opinion. That being said, all of the fundamentals of what is currently occurring points to a higher gold price in the future. I am not going to delve into why gold should rise in these times, as most of my readers are very aware of why gold strengthens when fiat money weakens. Rather, I will continue (as I did most of last year), to encourage discussions of why gold won't rise this year. It is only when there is an understanding and respect of both arguments that a rational decision can be made.
While most media highlighted that gold failed to perform last year, with many expecting $1200+ by year end, I view it differently. I see gold as performing excessively well. With asset prices tumbling, energy prices imploding, consumer credit drying up and consumer prices disinflating, gold's performance was actually quite remarkable. As a supposed store of value, gold's purchasing power over almost everything increased quite dramatically. Why?
The gold market, like all markets, is a discounting mechanism. Currently the gold market is pricing in that the Fed will stop at nothing to try to reflate the equity and real estate markets. Thus, the gold price is holding at levels where it was when real estate, energy and equities were significantly higher. I think the Fed will fail and thus a lower gold price is justified. Why will the Fed fail?
Nouriel Roubini's new estimates are that US institutions will see $3.6 trillion in credit related losses. Considering that the banking system started with $1.4 trillion in assets, this makes the US banking system effectively insolvent (source).
Then there are the secondary economic effects after these bank losses such as lost output and lower domestic demand. Higher unemployment is an added burden on the state. Although the numbers out of the Fed such as the growth in their balance sheet and the estimated $2 trillion+ of Treasury debt sounds ridiculously large, it is dwarfed by the actual losses we are seeing in the system.
Thus, a lot of this money being pumped in will (1) maintain the system at a unproductive level through higher unemployment costs and (2) barely fill the gap that these losses are mounting to.
Then there's another question: Is pumping this money in the equivalent of filling a pothole or is the analogy better suited to a black hole? If these institutions aren't allowed to fail, I fear that losses could mount in excess of even Roubini's estimates as the state continues to pay off losses that would otherwise be cancelled through the bankruptcy process. These losses include money thrown at the non-banking sector as well.
Gold price maintained value over the past decade by increasing to reflect what appeared to be increasing wealth of the global citizenry. Turns out it wasn't real wealth but rather inflated through irrational exuberance of the price people were willing to pay for real estate and the volume of consumer goods they were consuming. Bargaining power has shift from suppliers to consumers, unemployment is rising and asset prices are tumbling.
Gold remains high on the idea that the Fed will reflate. They have exhausted their first tool (interest rates) and are now focusing on other methods. Fiscal stimulus has its limits as the question still remains as to who will buy all of this government debt - not just the U.S, but every sovereign nation who is issuing record amounts of debt. The Fed could print to buy government debt, which surely will be a major theme this year, but it has its limits as well. As much as the Fed wants to stabilize asset prices, I believe that they are conscious of going too far and the destructive consequences of creating high inflation when unemployment is making new highs as well.
The Fed will eventually run out of ammo unless the rest of the world inflates and hands that money over to the U.S treasury to be returned 30 years later. In that scenario, the dollar could strengthen this year as I have highlighted above.
Gold will undoubtedly make new highs this year, but it will likely occur in reference to foreign currencies which are tied to exporting economies - that is the safer bet.
Disclosure: no positions
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This article has 39 comments:
Regarding those artificial asset prices, ANY ASSETS PRICE IS IT'S ONLY AND REAL PRICE WHERE BUY/SELL ORDERS MEET AND ARE READY TO TRADE AT THIS PRICE.ANYBODY WHO THOUGHT THAT PRICE OF US$ IS ARTIFICIAL AND BOUGHT AGAINST IT EUR BY NOW HE IS BROKE AND KNOWS, THAT BUY EUR/USD ORDER WAS MORE THAN REAL AS HIS PROFIT/LOSS WAS COUNTED FROM THE PRICE HE BOUGHT.
Nobody asks what is real what is not, the margin requirements are the same for everybody, when billion dollars investor on the margin call he liquidates just as happened with most hedge funds long commodities, they didn't ask if nickel price today is real or it was real when they bought it, it is they who were asked to close their fund by their bank or broker who lended to them real money...got it?
You wouldn't have all these currency wars & trade imbalances & probably wouldnt even have major wars as there would be little chance to inflate a currency enough to finance a war.
Gold, made by God, fiat currencies made by man. You decide!!!
why when the Fed fails, gold price has to go down?
This is only a assumption.
Oil prices....off about 70-75%.
What makes gold so special? I know the arguments and I own some...
that said it it had a nice run and has held up.....yea, so did real estate..
Nothing is safe in the current environment....like rolex said in a post...
we might start worrying about our bank and equity accounts...
oil producing countries could start to collapse...
One more shake out on the dow and we will see some real panic...
run on the banks and bank holidays...I fear the darkest days lie ahead...
maybe this year...maybe next year...this is big.
If the Fed is unsuccessful and deflation takes hold then gold will fall along with other asset prices. I consider this unlikely as the path the Fed is on takes us down a highly inflationary path. So we are left with the case that the Fed fails while debasing the currency (along with other governments), faith in paper degrades and gold rises as a hedge in the face of high inflation.
I fear your belief in the restraint of helicopter Ben and his buddies at the FED may be misplaced. It doesn't take much in the way of deductive reasoning to see that the chief concern of the FED is to rescue their member banks at everyone else's expense.
When push comes to shove, the FED will print with abandon. To do otherwise would be to admit that the entire central banking scheme was a fraud from day one, which happens to be the truth. I doubt very much that will ever happen without circumstances forcing it on Ben.
The US central bank has made a very good run of nearly 100 years, but like all other fiat money schemes throughout history it has reached the point where it unravels and is ruined. Same as it ever was.
The only question remaining is how bad things will become before everyone ceases to ignore the truth and acts upon it. When the unit of financial measure (currency) is purposely debased, it will eventually destroy an economy. How bad are we willing to let it become before we give up on fiat?
The founding fathers knew this, Keynes knew it, even the ancient Chinese outlawed paper money at one point. The rise of so-called "modern banking" is merely an effort to repeat an age old fraud under a new name.
"Ye shall do no unrighteousness in judgment, in meteyard, in weight, or in measure." - Leviticus 19:35
"Jan 20 Roubini/Parisi: Assuming a further 20% fall in house prices and unemployment peaking at 9%, we project total loan losses to amount to $1.6T out of $12.4T loans outstanding. Of these $1.6T loan losses, about $1.1T accrue to U.S. banks and brokers.
# Mark-to-market prices as of December imply around $2T in writedowns on $10.8T U.S. originated securities outstanding. Flow of funds data show that 40% of U.S. originated securities are held abroad. U.S. banks' share of writedowns is about 30-35%, or $600-700bn for U.S. banks/brokers according to weights in IMF GFSR October 2008, table 1.1
# Total loan and securities losses amount to $3.6T, half of which accrue to the U.S. banking system, or $1.8T."
from rgemonitor.com
If you are going to quote (or cite) somebody, do it right. While this still makes for an insolvent banking system ($1.8 T in liabilities vs. $1.4 T in assets), doesn't this make the case for more Fed fiat money and monetization of that debt?
Sounds good for gold to me. I'll stick with my gold that was up 4% last year and holding steady this year versus any other investment. The author can keep buying dollars- see you at the finish line.
The EU - in the mean time - is pulling along ex Eastern European countries, barren after decades of communism. A struggle ? Of course.
Let's not forget that the Clinton years ended with budgets in EXCESS.
Eight years of arrogant and unintelligent US Administration changed that in some big way... didn't they ? The US dollar sliced thru the solid support of 70 (dxy index scale) 15 months ago or so. It took some months for the US originated financial crisis to be felt outside of the US, and the currencies there to drop - while the USD - then - stood still, giving the ILLUSION of a strengthening USD ! So soothing for the US ego.
We are all in THE PITS and a hell of a lot poorer than some years ago. No question that gold (metal) is a very important safe haven, for as long as it takes.
Mr. Katz, for what regards your statements about your friends across the pond: they are just your uninformed opinions - so be it.
“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”
Just to clarify to everyone, I am referring to the trading of gold here, not the physical ownership. Over the next few months I will feel more comfortable trading gold bullishly against exporting currencies. The US has not produced anything for a while, so when we see extreme trade deflation, those countries which have been producing get hit hardest. When economic numbers come out over the next few months, we will see more evidence of trade deflation and job losses as a result. These exporting economies will purposely devalue their currency long before the USD will crash. That being said, in an absolute sense the USD is weakening from the Fed action, but other currencies are weakening MORE - thus on a relative basis the USD is strengthening and will likely continue to do so against exporting currencies.
From TradeTheNews:
Treasury nominee Geithner reaffirmed the US Goverment's opposition to currency manipulation, and view that trading partners should operate flexible currencies, under the Obama Adminstration
Those Clinton budget surplusses were basically smoke and mirrors brought about by counting Social Security taxes as income but not counting the future obligations they represented as an expense.
Find a chart or graph of the US national debt going back to WW2. It has increased every year, though very slowly during Clinton's term. How can the debt keep getting larger if we're running our budget at a surplus? Answer: it's not. The deficits are hidden via accounting gimmicks, but they are there none the less.
As far as the past 8 years, I agree wholeheartedly. Bush II has been a fiscal disaster for our country. Their behavior has been blatantly criminal in many regards, and I'm a life-long Republican so it's not like I'm simply party bashing.
The fact is that both parties have behaved irresponsibly while in office for a long time. Those acts are finally catching up to us with the mortgage crisis and recession, if not depression. As there's no way to undo the past, the only thing we can do is try to identify the proper way to proceed from here and try our best to head in that direction.
It's gonna be painful, no matter what.
Trillions of dollars is nothing. With a few PC keystrokes the FED can produce dollars greater than the amount of atoms in the universe.
I also believe (correct if you can show otherwise)
>> Was it Clinton or Bush who stopped 30 year bonds, because short bonds require a lower payout rate (in the short term)? Now the government is getting 30 yrs back in while rates are low. It may work in the end, but it sures leaves the next guy in a precarious position with only shorter term debt. It is not really balancing the budget, it is passing the buck.
>> Going in military spending may have needed the cuts, and I am not necessarily disagreeing with Clinton's ideas in concept. But Clinton cut military spending to the same level as the day of Pearl Harbour (approx. 3% of GDP) by the time he left. Along the way two US embassy attacks in Africa, US military base attack in Saudia Arabia, the USS Cole was attacked. Al Qaeda kept saying the US is weak, get them and the rest of the world kept seeing drawdowns with no retaliation.
Then 9 months after his departure the world trade center goes down on the THIRD try, after two bombing attempts failed during the Clinton administration (van outside, car in the parking garage).
en.wikipedia.org/wiki/...
Now anyone can downplay it or blame other factors all they want too. But it was a definite factor, and morally I will never accept it as a fair trade. And I have little respect for anyone who would disagree without considerable proof to the contrary.
On Jan 22 02:01 PM Smarty_Pants wrote:
> "Let's not forget that the Clinton years ended with budgets in EXCESS."
> - geehem23
>
>
> Those Clinton budget surplusses were basically smoke and mirrors
> brought about by counting Social Security taxes as income but not
> counting the future obligations they represented as an expense.
>
>
> Find a chart or graph of the US national debt going back to WW2.
> It has increased every year, though very slowly during Clinton's
> term. How can the debt keep getting larger if we're running our budget
> at a surplus? Answer: it's not. The deficits are hidden via accounting
> gimmicks, but they are there none the less.
>
> As far as the past 8 years, I agree wholeheartedly. Bush II has been
> a fiscal disaster for our country. Their behavior has been blatantly
> criminal in many regards, and I'm a life-long Republican so it's
> not like I'm simply party bashing.
>
> The fact is that both parties have behaved irresponsibly while in
> office for a long time. Those acts are finally catching up to us
> with the mortgage crisis and recession, if not depression. As there's
> no way to undo the past, the only thing we can do is try to identify
> the proper way to proceed from here and try our best to head in that
> direction.
>
> It's gonna be painful, no matter what.
Stated in a more simpler form: "Surrender your sovereign monetary right, and a country's political independence soon follows."
Auctions for 30 Yr. bonds stopped from fall 2001 to spring 2006, roughly 4 1/2 years during the Bush II administration. There have been regular auctions since they resumed in 2006.
2011 and 2012 there will be inflation and a very weak dollar.
Also dont forget we are in deflation with little or no chance of inflation for many years.
this time around, i think this ratio monthly salary/gold will come down to 1 again! if we think about how the americans are making less money in absolute terms, this ratio could go below 1!
either salary has to collapse(not gonna happen when the governments are hitting the printing press!!) or gold has to go up!
the choice is very obvious to me!
there's absolutely no better assets than gold in this environment!
2009 is the year of the Ox, or the bull in China. If you hold gold or gold mine, it will turn out to be the greatest bull year in your life!!!
On Jan 22 06:31 AM ROLEX18K wrote:
> I have seen many investors who say this or that asset price is artificial,
> if you were are real trader short US$ Index, by today you would be
> broke completely.But luckily 99% of writers on Seeking Alpha are
> just,well,writers and may continue to entertain me or traders like
> me with their great, funny, up to date stories.That's why I love
> Seeking Alpha, no other writers have such a sense of humour, such
> knowledge of finance!
> Regarding those artificial asset prices, ANY ASSETS PRICE IS IT'S
> ONLY AND REAL PRICE WHERE BUY/SELL ORDERS MEET AND ARE READY TO TRADE
> AT THIS PRICE.ANYBODY WHO THOUGHT THAT PRICE OF US$ IS ARTIFICIAL
> AND BOUGHT AGAINST IT EUR BY NOW HE IS BROKE AND KNOWS, THAT BUY
> EUR/USD ORDER WAS MORE THAN REAL AS HIS PROFIT/LOSS WAS COUNTED FROM
> THE PRICE HE BOUGHT.
> Nobody asks what is real what is not, the margin requirements are
> the same for everybody, when billion dollars investor on the margin
> call he liquidates just as happened with most hedge funds long commodities,
> they didn't ask if nickel price today is real or it was real when
> they bought it, it is they who were asked to close their fund by
> their bank or broker who lended to them real money...got it?
On Jan 22 11:46 AM tb1975 wrote:
> The author writes yet another flagrant misquote of Roubini. Roubini
> DID NOT say that the US banks are in a $3.6 Trillion hole. He said
> they were on the hook for half ($1.8 billion) of the total $3.6 Trillion.
> Here is the text from Roubini's website:
>
> "Jan 20 Roubini/Parisi: Assuming a further 20% fall in house prices
> and unemployment peaking at 9%, we project total loan losses to amount
> to $1.6T out of $12.4T loans outstanding. Of these $1.6T loan losses,
> about $1.1T accrue to U.S. banks and brokers.
> # Mark-to-market prices as of December imply around $2T in writedowns
> on $10.8T U.S. originated securities outstanding. Flow of funds data
> show that 40% of U.S. originated securities are held abroad. U.S.
> banks' share of writedowns is about 30-35%, or $600-700bn for U.S.
> banks/brokers according to weights in IMF GFSR October 2008, table
> 1.1
> # Total loan and securities losses amount to $3.6T, half of which
> accrue to the U.S. banking system, or $1.8T."
> from rgemonitor.com/
>
> If you are going to quote (or cite) somebody, do it right. While
> this still makes for an insolvent banking system ($1.8 T in liabilities
> vs. $1.4 T in assets), doesn't this make the case for more Fed fiat
> money and monetization of that debt?
>
> Sounds good for gold to me. I'll stick with my gold that was up 4%
> last year and holding steady this year versus any other investment.
> The author can keep buying dollars- see you at the finish line.
On Jan 22 03:11 PM Hmm?! wrote:
> I agree with Smarty Pants,
>
> I also believe (correct if you can show otherwise)
On Jan 22 08:53 PM CLH wrote:
> Gold will never again be used for money and only the crazy think
> it will. It worked in a world of few people and few business dealings.
> Buy it if you like it but not to make money (except at special times)
> or to protect your money. It is not money.
>
> Also dont forget we are in deflation with little or no chance of
> inflation for many years.
Maybe it has to do with options and the futures market...
I wonder if gold will fall shortly after people got out of their currently high options and/or futures positions ?
Just a thought...I am sure others are smarter than me :)
The appetite for long bonds is enormous, due to pension liabilities. So why don't they issue them?
They don't issue the long bonds because they know there is no inflation in the future, and that interest rates will get even lower, and stay low.
It's a great privilege to sit on your backside and collect interest when you do nothing. Billions of people now have money, and would like to collect interest, and do nothing.
Surprise. People will be underemployed and interest rates will stay low for the forseeeable future.
LordDarley
Earth OX, not just any old ox, get your oxen straight.
The yearly string of upsides will have been broken allowing Gold to do another sharp run to the upside.
But this is January. Accumulate on drops, by all means...Buy high? Not this kid.
On Jan 22 09:01 AM lonestar1 wrote:
> There is only one one question:
>
> why when the Fed fails, gold price has to go down?
>
> This is only a assumption.
So worst case, gold retains its purchasing power even though the number of FRNs per oz falls. Or it increases its purchasing power as investors rush to buy into it because of inflation.