It's been said again and again by bloggers and writers on the fringe of mainstream economic journalism: “U.S. economic policy is bad for the dollar and good for gold.”
Exactly how dollar negative – gold positive has not really been manifested in the price of either commodity to date. That all seems on the verge of imminent change.
Moments after the Fed announced it was going to start with a purchase of $300 billion worth in Treasurys gold zoomed upward from an otherwise downward trading day to reflect the impending devaluation of the U.S. Dollar.
The sheer number of fronts upon which the dollar is now suffering devaluation makes it even harder to pinpoint the exact rate of devaluation underway. The Fed’s balance sheet has essentially been expanded by over 200% in the last 12 months, and yesterday’s development will add an exponential multiplier that only yet-to-be-developed formulae will be capable of expressing in fathomable terms.
But was the sudden turnaround in gold a result of the inflationary implications of the Fed move, or was it more because the safe-haven aspect of treasurys were severely compromised looking forward?
One may argue that it’s a case of “six of one, half a dozen of the other”, meaning both are conceivably accurate.
Such an action is considered equivalent to printing money in order to generate more money supply and taking bad assets on the respective central bank’s balance sheet. Such action reduces the purchasing power of the country’s currency. The US $ index- a gauge of the greenback’s strength against a basket of currencies like euro and yen – lost as much as 3% after this announcement and closed at 84.59.
It has been suggested that the U.S. announcement was inspired by the apparent success of a similar tactic undertaken by the Bank of England last week, it would definitely appear that the G7 have adopted a policy of a race to print the most currency. Economic thinking driving such policy likely contemplates that he who has the cheapest currency will attract investment in local goods.
Its arguably the onset of a currency war initiated by both the Swiss devalution of its currency in combination with the English move. The U.S. doesn’t want to be the most expensive dollar again, as that means its inherent value will be destroyed, and confidence in it eroded, with every new trillion dollars printed.
The smart trade now, and one which the U.S. Federal Reserve has likely overlooked, is the purchase of gold with U.S. dollars. As the dollar dives, gold will rise, and so will every other currency. So the best way to hedge out the risk of dollar value collapse is to use them to buy gold. As long as the gold is sold in any other currency, there will be a double win somewhere down the road.