The dollar's demise is good for gold
22 Dec 2017 By Liam Sheasby
The US dollar has long been the reserve currency of the world but by virtue of being the leading global currency it is also the leading backer of debts and deficits. With the United States not having a true budget surplus since 1960, and trade deficits in place since 1975, the dollar is in steep decline.
The 2008 Financial Crisis:
The 2008 crisis came about from sub-prime (high risk) mortgage lending in the United States and high levels of default on payments. Debts were called in by the mortgage companies and very quickly this triggered a chain reaction of owed payments.
Since then the global economy has steadily clawed its way back up to a point of stability, with many nations adding to their gold reserves to cover themselves in the event of another such crash, but the fears are that the US economy is running on borrowed time with borrowed cash.
If the US dollar weakens too much then 2018 could be a similar scenario due to the high levels of public and national debt in the US, the UK, and other major Western nations, meaning gold would take over as the preferred reserve fund globally – driving up both demand and prices.
The US Economic Strategy:
President Donald Trump's proposed economic package that include a lot of infrastructure development projects and, while this is always good for promoting growth and subsequent strength in an economy, it’s at odds with his other goal: a weak dollar.
The logic is that a weak dollar means United States produce is cheaper and thus the current trade deficit is addressed, but it neglects the fact that a lot of components are imported into the States for industries such as car manufacturing. The weak dollar also impacts workers and doesn’t typically promote confidence amongst investors or those with savings – though this could change if the economy reacts positively to the government’s infrastructure projects.
No more Petrodollars:
Oil trading between the US and the Middle East was big business and resulted in a faux-currency known as the Petrodollar. The significance of this is that oil revenue for the past 40 years or so has been dominated by the US dollar, with Middle Eastern nations making strong reserves in the US currency.
The US is now virtually self-sufficient for oil supplies so trade with Saudi Arabia and its neighbours is dwindling. If the United States then go and weaken their currency these nations will lose both their faith and interest in the dollar as an investment.
The Crypto Bubble:
The rise of cryptocurrencies such as Bitcoin and Etherium could be good for the US government, but bad for the dollar. If the US government were to put a halt to these operations and implement their own national cryptocurrency with proper regulation then they could potentially dump debts and deficits onto the old paper dollar. Finding the flaws in digital currency seems a way off yet however.
The Rise of Gold:
The US crypto-dollar is a clever idea but it’s not a gambit that hasn’t been foreseen. Both Russia and China have been stockpiling gold. Russia especially is changing from reserves in dollars to gold, over fears about the weakening currency.
China has holdings in the US Treasury so isn’t making the same moves just yet, but were the dollar to collapse then this would likely trigger national gold backing from these two countries for paper currency, which in turn would drive up the price of gold and silver sharply because of the perceived value these holdings have for China and Russia and inevitably other major players in the world economy such as the UK, India, France and Canada.
The US economic plan is the point upon which all of the dollar’s success or failure hinges upon: the US economy needs to be productive enough to cover the losses caused by a weak dollar and add additional funds into the system to promote growth and investment. If it works, it’s a masterstroke move and a brave economic play and will likely negate all of the concerns caused by the decline in Petrodollars and the rise of cryptocurrencies. If it doesn’t then the dollar is dead and people will return to what they know will retain value – gold.