Ganging Up on Gold and the U.S. Dollar

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What is the significance, you may wonder, of the Russian Finance Minister suggesting the reserve currency days of the U.S. dollar are surely numbered, followed the next day by a statement from his deputy contradicting him thoroughly? Apparently a coincidence, Japan’s finance minister just happens to state publicly that same day that Japan has ‘full confidence” in the U.S. dollar.

What is the significance, you may wonder, of the Russian Finance Minister suggesting the reserve currency days of the U.S. dollar are surely numbered, followed the next day by a statement from his deputy contradicting him thoroughly?

Apparently a coincidence, Japan’s finance minister just happens to state publicly that same day that Japan has ‘full confidence” in the U.S. dollar.

Somebody, it would seem, is running around the international backstage putting the arm on government finance types to wax supportive of the U.S. dollar. As a result, we now have press headlines issued minute by minute that contradict each other completely:

“Dollar down on Russian comments,” reads one at 10:47 a.m.Tuesday. Two minutes later, “Dollar advances as Russia says no alternative to U.S. currency”.

One thing is clear. The U.S. dollar is in some serious international doubt, both as a reserve currency and as a sound currency. When the volatility of emotions runs the gamut from completely bullish to completely bearish within the same government, you know that stability is no longer a factor in the subject currency’s character.

With the first ever Russian-hosted BRIC (Brazil, Russia, India, China) summit underway in Yekaterinburg, Russia, the impetus for a stronger voice outside of the G7-dominated global financial system is building. And that, no matter who says what, certainly spells trouble for the reserve status of the U.S. dollar.

"These four countries are all quite influential in international economic development, and I think if in the meeting they raise some proposals and initiatives, that would be fair and reasonable," said Wu Hailong, a senior Chinese Foreign Ministry official.

"Especially, some countries have proposed establishing a super-sovereign currency, and I think their impetus is ensuring the security of each country's foreign currency reserves."

The growing unity among BRIC countries perfectly reflects predictions by renowned investors such as Jim Rogers and George Soros as well as contrarian economists such as Joseph Stiglitz and Nouriel Roubini.

Stiglitz in particular, a Nobel prize-winning and formal World Bank economist, has long held that the U.S. dollar needed to be replaced as the sole reserve currency.

"We may be at the beginning of a loss of confidence (in the U.S. dollar reserve system)," he said. "I think there is support for some sort of global reserve system, he said at a Credit Suisse Asian Investment Conference in Hong Kong back in March.

There are competing interests both for and against a weaker U.S. dollar, and those conflicts exist even within single G7 economies.

For example, America’s manufacturing sector benefits from a weaker dollar, because American made goods are more attractive to importing nations then. Some might argue that weak U.S. dollar is key to an American economic revival.

But a weak U.S. dollar means U.S. investors have to pay a lot more for assets in foreign countries than would their competitors with stronger more stable currencies.

At the Reuters Investment Conference in New York on Monday, technical analyst Robert Prechter said he thinks the U.S. will lose its AAA credit rating by the end of 2010, a situation that will likely further undermine the U.S. dollar’s attractiveness as a reserve currency.

But despite the rampant printing of dollars, and the increasing sovereign pressure for an alternative to the U.S. dollar as a reserve currency, most countries, including BRIC and G7 members, continue to support the dollar through the purchase of Treasury Bonds.

Typically, these countries want to see a strong U.S. dollar because that a) makes their exports more attractive price-wise, and b) the currency in which their trade (at this point) is settled remains dominantly U.S. dollars. So a strong dollar helps them with their purchase of imports.

This is no accident. The architects of the U.S. dollar reserve currency were aware as far back as the 20s and 30s that regardless of the condition of the U.S. economy, if the U.S. dollar was the reserve currency of the world, every other country would, to some degree, have a vested interest in insuring the continued health of the U.S. economy.

That manifests itself, when, against all reason, the market collapses in October, and the number one safe haven asset class remains T-bills and the U.S. dollar, at the expense of gold, silver, and all other global currencies.

In some ways, the world is damned if they do and damned if they don’t support the U.S. dollar, and in large part, it is that conundrum that continuously undermines the strength of the gold price on a week to week basis.

Recently, gold and the dollar have started to trade in opposition to one another, which is the pattern during healthy cycles of economic growth. If you were to observe the generalized trading patterns of oil, which can be considered as the basic expression of energy supply and demand, and gold, which is a measure of the health of the currencies against which it is compared, and the U.S. dollar, which is a proxy for the health of the global economy, you could recognize patterns that suggest a coordinated influence over markets through the manipulation of futures markets within each of these asset classes.

That has long been the contention of GATA (Gold Anti-Trust Action Committee), who sees the pattern of gold price suppression as definitive proof of a central banking conspiracy to ameliorate the volatility of currency markets by controlling the perception of the U.S. dollars relative strength.

Barack Obama’s stimulus spending is estimated to be in the neighborhood of US$9 trillion when all is said and done. That means the number of U.S. dollars in the world will have increased by 100% from the end of 2006 to the end of 2012.

If the U.S. were a corporation, which, in some sense, it is, then that means this public company with 10 trillion shares outstanding would be doubling the number of shares outstanding, not to increase output or productivity, but just to keep the whole house of cards from collapsing. As has been pointed out repeatedly over the last several years, the biggest ponzi scheme in history is the U.S. dollar. But with a significant differentiator that will ensure not only that the Ponzi scheme keeps on going, but that nobody buy nobody will ever be arrested and convicted for its perpetration.

So instead of the reality check that fringe writers insist is imminent, it is a lot more likely that we will all continue to support and participate in the Grand Delusion. It can also be maintained in perpetuity, or at least until resource depletion becomes acute. If the counterparties to these largest of transactions continuously find ways to avoid foreclosing on them, then how can we ever seriously consider a return to real and rational accounting?

And the reason for that, is simply that its within our interest to keep it going. All of our interest.

For if the United States dollar were allowed to fail, and the hyperinflation that so many predict as inevitable were actually allowed to take place, the result would be civil unrest across all of the continents on a scale never before seen.

Even the financial elites of the world understand that that is something they don’t want to happen.

Omer Esiner, a senior currency analyst at Travelex Global Business Payments in Washington suggested, “I don’t think it’s in anybody’s interest to see a run on the dollar.”

That’s probably the media understatement of the year, if not this century.

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