Right now we have a rising Dollar to thank for an opportunity to purchase gold so cheaply. Soon we will have a sinking Dollar to thank for boosting a meteoric rise in gold, silver, and the platinum group metals. Today we will take a look at why the dollar has risen lately, why it’s likely to reverse course, and what it all means for those who own precious metals. But we don’t have to rely merely on speculation or conjecture, when the facts of history are available to guide us through the conflicting financial signals we see each day. While history does not always repeat, it often rhymes with the past.
One of the reasons that the price of gold has struggled lately is the perceived strength of the dollar in international markets. When we look at how gold has been performing when measured in other currencies, we see that it is doing much better in many other parts of the world. Gold priced in dollars is nearly 3-times further away from an all-time high than gold priced in Japanese yen, for example. The Euro slipped below $1 yesterday, for the first time in 20 years. This is due in part to the difficulties Europe is facing with the prospect of running out of natural gas before winter. Gas is a necessary commodity not only to provide heat, but also to produce the energy that allows the factories to operate, and their economy to function.
While the situation on the international scene currently looks dire, unexpected solutions can sometimes appear out of nowhere. World leaders are already creating work-arounds, with new energy relationships developing between Italy and Algeria, France and the United Arab Emirates, and the European Union and Azerbaijan. What this tell us is that the dollar’s rise to ascendency on the back of Russian gas restrictions might be short-lived. In addition, some European nations (Austria for example) believe that Russian gas restrictions will resume after the scheduled maintenance period is completed. If that is the case, then the panicked rise of the dollar and plunge of the euro could be reversed. This implies the bargains available today for those buying gold with strong dollars, will see enhanced gains as the dollar falls. The timing seems perfect to purchase additional metal; I took my own advice and purchased more precious metals on Friday.
With all of the other good reasons to accumulate gold, silver, or platinum today, the good fortune of dollar strength is just an added bonus. Dollar strength currently allows us to purchase gold less expensively now, while dollar weakness in the future will enhance gold’s performance later on. There are multiple reasons to expect the dollar to weaken from here, especially since it has rallied significantly the last few months. A portion of the movement in gold’s price can properly be attributed to the movement of the dollar, up or down. In other words, often when gold is up, the dollar is down, and vice-versa. Metals author and commentator Jim Rickards said “If you want to understand where the price of gold is going, you have to ask yourself where is the dollar going.” I believe the dollar is due to trend lower from here, for the following reasons.
Lower Demand for Dollar-based Assets Worldwide
It was reported this week that some of our largest trading partners have begun selling off their horde of dollar-based reserve assets, to the lowest levels in 12 years. Both China and Japan have been reducing their holdings of U.S. Treasuries; China has been doing so for 6 months in a row. But it is not just China and Japan. U.S. reserve assets have also been reduced in countries such as Brazil, Hong Kong, Singapore, Saudi Arabia, Luxembourg, Norway, Korea, Poland, Ireland, Taiwan, Vietnam, United Arab Emirates, and many others as listed in the U.S. Treasury Department data. So the question then becomes, who is buying what the above listed nations are selling? Besides supplemental purchases by a few stalwart friendly nations, much of it is purchased by various government agencies, including the Social Security Trust Fund. In other words, the United States is becoming both borrower and lender at the same time.
We have seen this playbook before, and should have an idea about what comes next. While the reasons for our debt are somewhat different than years past, our level of indebtedness is similar to what it was during and immediately after WWII. We are entering a period known as “financial repression”, whereby the yield on government bonds is kept artificially lower than the rate of inflation. Another way to describe this is an environment of negative real interest rates, which destroys the purchasing power of savers who keep funds in a bank or hold government bonds. Market strategist Russell Napier describes financial repression as “…the art of stealing money from people slowly.” Thankfully there are strategies we can use to protect our families and finances from the ravages of financial repression.
Financial Repression vs Gold & Silver
From the period 1945-1980, real interest rates were negative over half the time. This means that over half the time for 35 years, savers were losing purchasing power on their savings. But during the same period, gold protected purchasing power, rising an average of 9.04% per year from 1945 ($36) to 1980 ($843). While more volatile, silver rose an average of 13.09% per year from 1945 ($0.52) to 1980 ($49.45). Silver and gold achieved a good reputation for preserving value and growing assets during periods of financial repression. We have every reason to believe it will do the same in the current environment of stagflation, inflation, and financial repression.
With a debt-to-GDP ratio of 120% following WWII, financial repression allowed the government to lower the ratio to 35% by the 1980’s. Currently this ratio is approximately 128%, and must come down for the United States to continue as a viable power. Without an outright default on obligations, financial repression continues to be the most politically palatable and likely means of diminishing the debt-to-GDP ratio to sustainable levels. As multiple states prepare to send citizens money to “help fight inflation”, they will continue to push the value of the dollar lower, and the value of gold & silver higher.