If you were China's central bank, would you not swap Dollars for Gold Bullion right now...?
REPORTING OF THE U.S. financial problem is focused on internal solutions with little attention being paid to the position of the Dollar in the rescue formula, writes Julian Phillips of the GoldForecaster.com.
Yet it is against the Dollar – and thus against its global dominance – that Gold Investments and silver have moved inversely for the last year and more. The decline in confidence in the US financial system, notably from foreign Dollar holders, has been dramatic and irreversible, with major consequences for the future of the world's No.1 currency.
The fall in the Dollar in the few days leading up to Congressional approval of the $700bn bail-out bill has been faster and further than the market expected, and it reflects foreign sentiment towards Paulson’s “TARP” package.
Foreign investors, including sovereign government wealth funds, are clearly underwhelmed by these hastily produced proposals.
The problems faced by the US financial system have been building up for some time and do require a fundamental reform of the principles underlying that system if confidence is to be recaptured. After all, every other nation on earth has to earn the Dollars it holds. Yet the United States can simply print them, and in vast quantities.
Does this make a mockery of the underlying value of the currency?
Gold Bullion continues to be seen, even by central banks, as a “counter to the swings in the Dollar”. With the current lack of confidence in the currency and the system that backs it, gold is clearly more measurable, reliable and free from the adjustable promises of men. This has to count in these days where money rules the globe – not military power, land or religion.
This estate of printed money has dominated the globe since 1971, led by one superpower, the USA. Bring this into question and the ramifications are excessive uncertainty and sapping confidence. With the East winning the battle for wealth on the trade front, the days of the Dollar as the global reserve currency have been numbered by these recent US financial events.
All other global currencies are based on, and reliant on, the US Dollar. Thus they face the same maladies as US money, relative to their dealing on the trade and capital front with the United States. It is therefore clear that all other global currencies will feel the ripple of US collapse to a greater or lesser extent. None can escape them.
We have discussed in earlier articles how the evolution of gold will be to move away from reflecting a relationship with the Dollar to reflect the state of all the globe’s currencies. Previously when the Euro/Dollar rate was the measuring line, it implied that gold moves with the Euro, which is a baseless comparison. Gold is rising in each currency that is weakening, and also in an environment where one currency after another will falls. So gold demand in each nation is also rising, once local investors realize the damage being done to the buying power of their currencies.
Where foreign currencies are held in national reserves, particularly where there are weakening currencies (e.g. the Chinese Yuan), Gold Bullion is looking more and more attractive. While the amount of US dollars in Chinese reserves stays so huge, gold does not yet appear a realistic addition to their reserves. Their buying would propel the Gold Price to such a level that they would not be able to acquire sufficient quantities.
It does make sense, however, for China to buy all local production for their reserves, a move that would not initially cause the international Gold Price to rocket.
No doubt though, with European central banks moving rapidly to cease their gold sales, governments the world over are accepting the importance of gold as a reserve asset. Will they act on this conclusion? We wait in anticipation to see if they do.
Meanwhile, what does the Paulson package say to us all? The sight of Wall Street investment banks collapsing and the impact it has on US citizens sends tremendous alarm signals to those outside the United States to protect themselves from these problems/plans. This conclusion cannot be avoided. A large rescue package, larger than the one before, does not solve the problems as exemplified by the rescue packages of the past.
Yes, the markets may be becalmed but the tide has changed. Prudence demanded a run for cover and still demands it because the risks inherent in the system remain. House prices are falling, consumer access to credit remains diminished and trust has largely disappeared with matters getting worse still. Bankers themselves remain in trauma and need to be convinced that they can accommodate consumer credit against assets that need to rise in value from now on. Will that happen? What is needed now is renewed confidence and that still seems far off.
A recession is here, and the possibility of yet another financial disaster remains a present danger, this time on a global scale. The ability of the global economy to absorb another crisis is growing thin. Each time a crisis occurs, Gold Bullion looks to be a safer place. Each time investment managers are disappointed with the solutions to the problem of the US its role as global economic leader wanes. Each time this happens, the $ looks more vulnerable. So what’s next?
In the States there is only one currency choice for the US citizens. Yet nations overseas have a choice. If you had that choice, would you hold the Dollar if you didn’t have to?