Dollar Doomed, Gold Glitters
"The US should be afraid, very afraid. China is questioning the dollar's status as a reserve currency and, at US$1,000 an ounce, gold has become the world's de facto currency" -- John Ing, Maison Placements in Canada.
It is a chilling statement from an expert on both gold and China. But he is just speaking truth to power: In a G2 world (the US and China), he who is the piper calls the tune and China holds a US$2-trillion mortgage on the U.S. and is not happy. This country, along with others who lend money to the U.S. such as Saudi Arabia, will determine the value of the US$ and gold. And they have spoken. They are not buying more US$ treasuries and are buying gold as a new asset class. China announced that it was doing so quietly and recent reports are that the Saudis and others have been buying bullion and hocked gold jewelery from around the world to be melted down in Middle Eastern refineries.
Gold gains as America loses
The only way is up for gold prices because the U.S., which backstops the IMF which is the world's lender of last resort, has had to become its own lender of last resort.
Washington has cranked up the printing presses in an unprecedented way, replicating the behavior of its spendthrift corporations and consumers. This year's budget is US$3.5 trillion, bigger than any in history including Napoleon's when he was taking on the British, Germans and Russians at the same time.
And as Ing points out, the "bi" in this bipolar global economy is China and it is not amused. Beijing has not only started to hoard gold but has continued to talk up a new reserve currency concept to replace the US$.
The writing's on the wall and the only reason the Chinese and others don't dump US$s is because it would be like shooting themselves in the feet.
For more see Diane Francis blog.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
The dollar has been doomed since the Fed was created in 1913. This has been done by design and the only ones who benefited from this devaluation are the Fed's member banks. Since then, the dollar has lost more than 90% of its value. That value which was lost can be found in the pockets of the executives and shareholders of the Fed's member banks. The dollar will continue to lose its value as long as the Federal Reserve is unconstitutionally controlling our currency. The dollar's value sometimes goes up, but that is just temporary, the general trend is always down and that's the way it will continue unless we abolish or nationalize the Fed.
Gold spiked in 1980 at $2000... for a few weeks. Then everybody who bought it during that bubble lost most of their money. So if you want to participate in the next Ponzi scheme, buy gold! If you want to keep your money... don't.
Posters on here have been warning about this possibility since the beginning of the Iraq war.
Borrowing money to pay for a war, which does not produce much of anything beyond death and destabilization of the ME, while deferring taxes is never a sound economic policy.
You do know the Bush "tax cuts" were not cuts but a tax deferrment. The money was spent, it is still owed and someone someday will have to pay it back.
The same can be said for President Obama's "tax cuts", except that there is some hope that they will actually produce something such as job growth, which will add taxpayers to the rolls to help pay for them.
Ms. francis, you sound a lot like Peter Schiff, someone I have been reading for years. Unfortunately, I think both of you are right.
To a certain extent, China is stuck with our debt. If they start selling their Treasuries, the market price will fall rapidly while buyers are found. Even if they merely stop buying, their current holdings will decline in value.
The notional value of China's reserve assets is based on the assumption that they will continue to purchase U.S. debt and currency instruments. If this assumption breaks down, their reserves lose value. Any reallocation would have to unfold gradually over several years to avoid moving the market.
China can't survive as an export-oriented economy without a strong dollar, and developing a culture of domestic consumerism could take decades for a developing economy emerging from subsistence agriculture and centrally-planned socialism.
The global financial crisis will be bad for the dollar, but it will be bad for almost all banknote currencies. When the dollar really begins to slide, China will take steps to competitively devalue the yuan against the dollar to save their export sector. It will be globalization's next race to the bottom.
I am afraid you are greatly underestimating China. That's the next great American Delusion, now that we are finally laying off the ideas that we can be world police, that torture works and that driving large cars makes happy.
funny thing is that a number of folks who post here have called gold just another shiny metal with no intrinsic value...
But China, who should know, is buying it up in lieu of our currency.
What do they know that these posters don't seem to get?
It isn't that gold is becoming more valuable relative to other commodities, it's that financial assets are becoming less valuable relative most commodities.
Gold is just another shiny metal, but as a tangible substance subject to natural supply scarcity, it has intrinsic value, while banknote currencies only have speculative exchange value.
The fact that gold has intrinsic value is an excellent reason NOT to use it as an exchange medium, since using gold as a currency distorts the price to use it for other purposes.
Gold isn't a banknote currency. It's in a completely different asset class. Almost all currencies are weakening against almost all commodities. This isn't about the dollar or China.
"What do they know that these posters don't seem to get?"
They know when to sell and they can afford to sit on it for 50 years... if necessary. Something most gold "investors" can not. And finally the Chinese government has a market for gold: the Chinese people. Chinese believe that buying gold ingots, little statuettes and other fun things made of gold (or just gold plated) brings luck. Multiply that fetish with 1.3 billion and you have plenty of people who will buy gold in the future.
India's the same way. Gold jewelry is big there. As a matter of fact, I think India is the world's biggest consumer of gold right now.
Yes, this has been clearly what was going to happen since 2004. The question was just when.
It means that US interest rates will have to rise. And that will be bad for the US economy. It means that we may come out of this recession, but it will be very, very, very slow.
I think it means the worst of both worlds--Stag-flation.
No, staglation can only happen in the presence of wage inflation, which is very unlikely to happen in a globalized economy.
Monetary inflation plus steady or declining labor rates equals asset price inflation, which doesn't feel anything like wages and consumer prices chasing each other in the 70s.
Great summarisation about the world and economics. However, the amazing thing is that the USA still believes it is number one in all good things.
Doomed you are.
paixa3, we are the Soviet Union circa 1985, the banksters just don't want the citizens to know until they clean up. All for them, none for us, this empire is doomed.
Sad but true Mr. Dan.
You must be logged in to comment. Log in or connect with
