AuGod!

Is the Gold - Dollar Relationship Breaking Down?

Gold is gold. I don't think folks who like the metal advocate the day-to-day use of it as a currency. It can provide some basis for a currency that is arguably more intelligent than a smokin printing press but its price, due to relative scarcity would quadruple in a flash if a gold standard were re-adopted. If I had a "gold clause" in my contracts, I would as likely as not exercise it and take more in bullion as opposed to paper. That is just a personal preference and for my own reasons obviously.

The relationship of the U.S. dollar to physical gold is simple enough to understand. The gold SPOT market is in U.S. dollar so its price is in U.S. dollars. When the dollar rises vis other currencies it makes the metal more expensive in those currencies. The opposite applies equally. As for the U.S. dollar as Reserve Currency, I think it is safe enough. A reserve currency is just a trade tool, a medium of exchange. As a forex investment the U.S. dollar is another matter entirely. Those long and short the dollar have different volatility worries than those managing gazillions in foreign reserves. Despite any blustering by the latter. As an example, note the Chinese purchase of U.S.$ 50 billion in IMF SDRs, which is about 32 billion in SDRs. That is a drop in the ocean in the currency world, but worthy of note is that SDRs are interest-bearing IMF assets based on a basket of four international currencies: the Japanese yen, the euro, the British pound and (drum roll please) the U.S. dollar. It is a means of diversification while at the same time supporting the IMF's need for about 10 times that number to be used to help troubled economies. For the Chinese seeking diversification, the SDRs represent a relatively stable and secure investment not an abandonment of the U.S. dollar. Also worthy of note is that the Chinese government is recommending its citizens buy gold. Now why would that be? I think we all know.