Bad News for the Dollar…Good News for Gold
By Paul van Eeden
Last week, the U.S. dollar fell sharply against the euro and other European currencies, causing a spike in the gold price. Silver and other metals prices also benefited. U.S. bonds fell, U.S. stocks fell, U.S. interest rate rose and the gold price increased. There it was: the dollar falling with rising interest rates and a rising gold price. Regular readers of these commentaries know we were waiting for this exact scenario. Under these conditions, I expect the gold price to continue to move upwards; even though it never does so in one, smooth, straight line.
What caused the drop in the dollar? U.S. Commerce Secretary Carlos Gutierrez warned of rising protectionist sentiments in Washington while in Beijing on Thursday. Later in the day U.S. Treasury Undersecretary Timothy Adams told a congressional committee that his department’s number one priority is to get China to revalue its currency (upwards) against the dollar. Prior to this, Senators Schumer and Graham had proposed a tariff of 27.5% on all U.S. imports from China and were going to force a Senate vote on the issue Friday. However, after returning from a trip to China, the two decided that they would, after all, not force the Senate to vote on Friday.
Anti-Chinese sentiment in America has been brewing for a while and it seems to be only a matter of time until they either enact protectionist legislation, such as tariffs, or force the Chinese and Japanese to let the dollar fall. I wrote about this before and showed that the most likely outcome would be for the Chinese and Japanese to let the dollar fall.
The problem, of course, is the ballooning U.S. trade deficit with China. In order to let the renminbi appreciate against the dollar, China will have to sell more of the trade dollars it receives and buy fewer U.S. Treasuries. That also means Japan will have to buy fewer Treasuries because the yen will follow the renminbi, and so will all the other Southeast Asian currencies and probably also the European currencies. But if all these currencies appreciate against the dollar, then all foreign investments in the United States will have their returns diminished. If you were not a U.S. resident, would you invest your capital in the United States knowing that its legislature is hell-bent on devaluing the dollar? Probably not, which is why investors reacted with their pocket books this week.
The net result of reduced foreign investments coming into the United States will be higher U.S. interest rates, a lower U.S. dollar, a falling U.S. stock market, declining U.S. real estate prices, rising unemployment and rising gasoline prices due to higher oil prices as a result of a weaker U.S. dollar. And, of course, a rising gold price.
Editor’s Note: Paul van Eeden is an independent investor, analyst and newsletter editor. Not only does he do his own research on the fundamental drivers behind the gold market, he also takes a hands-on approach to investment analysis: interviewing management, studying exploration projects and visiting mining operations. Whilst investing in mining and exploration companies is inherently risky, value is never far from his mind and features forcefully in his selection criteria.
Most of Paul’s time, now, is devoted to finding investments for his own portfolio. You can learn more about him here: