Is Gold a Hedge on Uncertain Dollar Outlook?

The opinion of currency analysts on the immediate outlook for the US dollar is almost evenly divided between two extremes: those who think the dollar will rise significantly in value by the end of the year; and those who conclude that the greenback will fall.

It is a pretty fundamental disagreement among folk paid a great deal of money to get these things right. Why then is there no consensus on this vitally important matter?

Government intervention

The main problem appears to be in deciding how the bank bailouts and stimulus packages will impact on the US dollar later this year. Let us look at the two sides of this argument.

If the bailouts and stimulus measures do their work then the US economy will continue to recover from the tentative bottom we have reached today, and it will recover ahead of other nations. Ergo the dollar will rise in value relative to other major currencies.

This argument could also work in another way: if US markets crash over the summer or into the autumn then a big sell-off of stocks will mean a major shift into the dollar, and rally the currency higher, even when the stock market and economy are tanking.

The converse argument is that the 10 per cent rise in the M0 money supply this year is setting the US economy (and others that followed its example) for a sudden burst of inflation. This would be received negatively by currency markets that would mark the dollar down against less inflated money supply currencies.

Confusingly this argument might well also apply in the case of the recovery scenario, thus upsetting even the most optimistic forward view of the US economic outlook.

Observers can be forgiven for not knowing whether to buy or sell the US dollar with this divided and polar advice. The obvious rejoinder is to consider economic prospects in other major economies, but again this does not help much.

Japan looks in worse shape than the US, the UK too, and the euro-zone has plenty of icebergs buried in its banking system. So if the dollar is to devalue it is far from clear against which currency it might do so, except commodity currencies that do not have fixed pegs to the US currency or precious metals.

Hence one way to sit on the fence would be to hedge dollar exposure with precious metals or commodity currencies. Certainly diversification is a tried and tested strategy for dealing with uncertainty.

Comments

[bkdc:]

If you're trying to guess for the next 6 months, you're just betting at Vegas. But if you look at a time frame of about 5 years, inflation is an almost sure bet.

Jun 30 06:34 AM

[knight:]

First comes deflation (stronger dollar) then inflation (weaker dollar/gold/oil) this will be the scenario that plays out in the next 12-18 months.

Jun 30 08:59 AM

[jayminho:]

you gotta a point for sure.
lets see what happens, as history (and graphics) show us. there is always a retracement, sooner or later, this will happen. summer ? mid.2010 ? dont know.. but will.. then gold comes strong, just not as strong as those stupid apocaliptical messengers perpetuating on youtube, and every mass media avialable channel. then.. we go back to normal. it has always been like that. why this time it will be different ?

anyway, as said before, good analysis on gold.

Jun 30 09:00 AM

[fireball:]

i look at p.m.s in possession as insurance of buying power. gold is the measure of fiat currencies.
the dollar has been ridiculously over issued but so have many others. the euro has been overdone. the chinese stimulous may have been targeted a little better than our porkified stimulous. a lot has been done to damage buying power and the prudent saver everywhere.
decoupling may have happened a little but if the u.s. market falls the rest will to. dollars will retain their safe haven illusion for a year or three.

Jun 30 09:08 AM

[Allan Frain:]

"If the bailouts and stimulus measures do their work then the US economy will continue to recover from the tentative bottom we have reached today, and it will recover ahead of other nations. Ergo the dollar will rise in value relative to other major currencies."

The bailouts and stimulus measures will sink the dollar long before will will see recovery against a federal deficit at 13% of GDP, a continuingTrade Deficit and a bankrupt consumer. Monetizing the equities markets is NOT recovery.

Jun 30 02:57 PM

[Hot Richard:]

"If the bailouts and stimulus measures do their work..."

And if my butt were square...

A rise in the dollar relative to other major currencies means nothing so long as the real value of that dollar (and all other major currencies) shrinks. Everyone not taking a government paycheck knows this.

Had it JUST been a wealth redistribution (your wealth redistributed to their friends), that would be bad enough for the economy (the whole take-from-the-efficien... But the printing presses and massive debt really cornhole the US$.

Bad, bad times. When I see a safe fiat currency, I'll be sure to "produce" a brick.

Jun 30 03:08 PM

[Think-About-It:]

Hot Richard,
You have a way with words! LOL

Jul 01 03:15 AM

[AndrewBaker:]

One thing is for sure: we're nowhere near a recovery and the markets are not going up any more for a long while. The dollar would be in a worse position right now if it wasn't for the fact that other currencies have problems in their home countries too. Europe, UK, Japan all are suffering, so relatively the dollar is not so bad. Gold is a safe haven at times like this as it is very unlikely to lose value and the upside is substantial as more bad news comes out. So, yes, gold is a hedge against an uncertain dollar. If you don't already have a position, then buy in now whilst the price is consolidating and preparing for the next leg up.

Jul 01 09:09 AM

[dcb:]

releveraging is not recovering.


On Jun 30 02:57 PM Allan Frain wrote:

> "If the bailouts and stimulus measures do their work then the US
> economy will continue to recover from the tentative bottom we have
> reached today, and it will recover ahead of other nations. Ergo the
> dollar will rise in value relative to other major currencies."<br/>
>
> The bailouts and stimulus measures will sink the dollar long before
> will will see recovery against a federal deficit at 13% of GDP, a
> continuingTrade Deficit and a bankrupt consumer. Monetizing the
> equities markets is NOT recovery.

Jul 01 06:09 PM

[dcb:]

the problem with all this analysis is that it fundemantally doesn't take into account the the market (at least by money flow) should have corrected significanly. but as any trader can tell you the powers aren't go to let it fall below 880 on the S&P unless banks have capital.

this is part of the unseen bailout program that doesn't get approved by congress and is behind closed doors. the market may be allowed to go up and then crash, but until enough people are in it to force it down via selling it aint going down. if nobody is left in the market to sell, then it can only go up. the banks aren't going to let their assets drop unless they have too. they can't afford more margin calls.

I see technical analysis, I see what happens with big blocks of stock, and all I know is there is a lot of funny business. after yesterday today would have been another down day, until we hit the real support line (drawn from the march low until the recent bottom) . But instead of taking profits on the gap in the am and trading lower "the boys" gunned early and took profits late to maximize their gain.

since they didn't buy billions at the tail end of the day, one can assume they have taken their profits from this run and now it can drop for a couple of days. when they gun early and drive up it forces short covering to increase their gains and then they sell into it. the market has become a joke and is only a tool for the government to get money to the banks. All hail government Sachs. it will only end when they possess every material thing this country has to offer and it's citizens are broke.

Jul 01 06:21 PM

[dcb:]

believe me they are making profits on both the upside and downside since they know when they will take profits and knw what they will support in advance

Jul 01 06:27 PM

[one eye:]

Essentially, the Article says: the USD will either Go Up or it will Go Down.

I concur.

The Prognosis? Diversify. Diversify into what?

Why Gold, PMs or other Currencies, of course.

This Is Not Diversification, this a One sided play for the Fall of the USD.

Jul 02 05:20 AM