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U.S. Dollar Gets Upper Hand

Precious metals spot prices (on the whole) slipped lower for the fourth week in a row last week. Once again, traders bought the U.S. dollar and sold precious metals futures. They also sold stocks for a change. The S&P 500 fell 1.3% on the week.

The U.S. bombing in Syria failed to spur much buying in gold and silver -- at least on the COMEX. Perhaps traders have grown accustomed to geopolitical turmoil abroad. The new campaign didn’t elicit much reaction.

However, buying in the physical market for coins, rounds, and bars has been brisk. Gold and silver stackers are coming out of the woodwork to add to their holdings at these 4-year lows. Total ounces sold may set a new monthly record at Money Metals Exchange.

For more about the remarkable developments in the dollar and how they impact you, read below…

Not Jumping on the Dollar Bandwagon

All hail King Dollar? The buck enjoyed its 11th straight week of gains relative to the world’s other paper currencies. The dollar index (DXY) now rests near 4-year highs.

The financial press is talking ebulliently about the rally as merely the beginning of a bull run for the U.S. dollar that could last for years. The premise? A strengthening U.S. economy and the end of Fed stimulus.

U.S. economic growth, as measured by official GDP numbers, is outpacing growth in Europe and Japan. And China’s rapid rate of growth is slowing. Investors around the globe are scurrying to find investments in the U.S., and bidding for dollars with which to make them.

Meanwhile, central banks in Japan and Europe are ramping up stimulus, just as the Fed is on schedule to end bond purchases next month. The Fed is even thought to be planning to raise interest rates sometime next year. So it’s not too surprising to see the dollar strengthen relative to the Euro and the Yen. But the up move may now be getting overextended.

U.S. dollar index chart

From the New York Times last week:

"After more than a decade of low interest rates and easy money, the notion of a strong dollar harks back to some seemingly distant periods in economic history, like the years of balanced budgets under President Clinton in the 1990s or the height of Ronald Reagan’s popularity in the early to mid-1980s."

Uh oh. Looks like few important facts are disappearing down the memory hole. The financial press is comparing today’s dollar with that of the 1980s. Beyond a few quarters of anemic GDP growth and a several week rally in the DXY, we aren’t sure what the basis for comparison is. But we’d like to remind people of a few differences.

For one, gold was in the $400 range, and today it’s 3 times that. Here’s another:

U.S. debt, adjusted for inflation, is quadruple the average seen during the 1980s, and it’s growing fast. Growth in entitlement obligations of the U.S. government is more startling. The dollar bugs at the New York Times forgot about this, not to mention the fact that a stronger dollar makes the real burden of U.S. debts and obligations even larger – an unacceptable situation for central bankers.

U.S. national debt approaching $17 Trillion

Do the experts at the Times expect economic growth to be so strong going forward, that U.S. taxpayers will scoff at this burden? If so, someone ought to remind them there are significantly fewer people with jobs as a percentage of the population than during the 1980s and that real incomes have been in a near constant state of decline since then.

The Times is also forgetting that during the 1980s and 90s, there was no credible threat to the U.S. dollar as a reserve currency. Remarkable, given the number of recent headlines declaring that China, Russia, and other nations who are less enamored with the dollar’s prospects (and U.S. foreign policy) are working to dethrone “King Dollar.” And according to the Times’ own op-ed pages, officials within the Treasury Department now advocate for the same end.

Modern central bankers around the globe love to prescribe stimulus -- and the long-term goal is to inflate. They are upfront about it. Now Fed Chairpeople target an inflation rate publicly. Fiddling with the levers of money creation is their one and only trick.

The Fed hasn’t abandoned the stimulus of ultra-low interest rates. Nor does it particularly want a strong dollar. Paul Volcker as Fed Chair during the 80s demonstrated an interest in a stronger dollar for a period of time. Janet Yellen talks openly about having a finger on the stimulus trigger, and she is ready to fire as soon as circumstances call for it.

Even if the dollar does strengthen as compared to other floating, unbacked currencies, that does not mean that it will strengthen versus gold. All currencies have been losing value against tangible assets over time as countries around the world engage in loose money policies and competitive devaluation.


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