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Gold vs. Dollar Devaluation

Just how likely and imminent is a Dollar devaluation...?

gold watchers are expecting a major Dollar devaluation before the end of the year, writes Julian Phillips of the

Some say it could be any day now. Certainly the fundamentals have pointed that way, as we have discussed for some time now, this despite the repeated "Strong Dollar Policy" statement from this and the last US administration.

The concept is no doubt alarming and implies a radical change in global economics. We believe that should such an event occur it should be seen as a culmination of major changes precipitated by the 'credit crunch', the rise of China and the imperative need for a change in the currency world to accommodate these events. If such a change is not made, the currency world will see major structural fractures that will hurt the stability of the global economy, dramatically.

As you have seen from our work on this subject over the last few months and will see as this picture forms, major changes are inevitable. The question is, will they come about through a civilized adjustment or must confrontation and unilateral moves be needed?

We issue a warning in case this should happen; the entire currency world will be thrown off balance by such a move and every currency on this planet will feel the reverberations of such a devaluation and for some time to come. If it happens in a civilized manner, it will still happen 'overnight' and catch us all by surprise. If confrontation is involved, add fear and trepidation to that surprise.

Global currencies are not independent of each other. Yes, each currency is run independently and reflects the overall state of the Balance of Payments of each country. Despite G-8 assurances that 'competitive devaluations' will not be undertaken by those bodies, by far the bulk of global currencies 'encourage' their exchange rates to retain the global competitiveness of that currency through the adjustment of interest rates and more directly occasionally by the buying and selling of that currency in the foreign exchanges. Switzerland, Canada and Japan are good examples of this. Some nations, such as China, control the flow of funds through the exchange rate with Capital Controls too. Global trade is the cement that binds currencies together, allowing Capital flows to adjust many Balance of Payments. So if the globe's major reserve currency is devalued, no-one will escape the impact on their daily lives.

For example, if the Dollar is devalued against the Euro by 30%, an Airbus will be that much more expensive than the Boeing equivalent. An import from China (where the Yuan is currently pegged to the Dollar) will also drop in foreign currency prices by 30%, but remain the same in the US Dollar.

Unless other nations retaliate by devaluing their currencies by a similar amount, they will find their Balance of Payments skewed as though they revalued their currency by that amount against the US Dollar. So what should a local investor do? The obvious move is to get out of the Dollar before it happens, if you believe it will happen.

Of course, it is quite a gamble to take to stay in the Dollar while the threat persists. At what point does prudence become gambling?

Many have not thought through the Chinese rhetoric of the last few months as they spoke of a "Basket of Currencies" being the shape of their reserves, which currently have $2 trillion amassed to date. This implies that China will accumulate the currencies of the nations with whom they trade and stop using the US $ as the intermediary currency for their global trade. Right now, ask a price of a product from a Chinese exporter and you will receive a US Dollar price. But systems are being practiced now to price both in the Yuan and in the currency of the importer. (This does not imply that the Dollar will be sold by the Chinese.)

These changes are already bringing tremendous uncertainty to the global economy as we have seen economic conditions flow feely from one country to another through the banking systems. So where do you go? Some investors felt that one was safe with a respected currency such as the Swiss Franc, until that government dropped their interest rate and sold Swiss Francs into the market. This dropped the exchange rate of the 'Swissy' sufficiently to squash the thought that it would prove a haven from a falling Dollar-Euro rate. Likewise, for a generation, the Yen has been adjusted to the US Dollar, with capital moving out when the Yen was strong and exports leaving the country when the Yen was weak.

So is there a currency that one can rely on to preserve wealth? Not one that will ride through all storms! All currencies will see a buckling or a burgeoning at some point in time, demanding that prudence makes us traders in currencies.

The markets have decided that it is time for gold to begin to rise again as it breaks out through its $943 level. Is this fear of a Dollar devaluation? Late in July, the Dollar buckled through the $1.42 level, a level we have not seen for some time. But is a fear of devaluation out there? We have heard from three qualified sources that something like this is afoot.

Timing is critical, because of the potential impact of such a move. A question that has to be asked is, "Is it wise to hold the Dollar in such a currency climate?" At the moment the Dollar has recovered and gold has apparently lost strength to pull back to $930, but even a fall to $920 will leave it the potential to break up any time now. Likewise the Dollar recovered to the $1.41 area against the Euro, but this has not meant it has turned up again.

We won't say that the Dollar is falling because of the devaluation rumor, but we do say that it is falling because more and more investors of capital back into the States are slowing their flows and in some cases selling their investments there (excluding China). It is also possible that this trickle will become a stream out of the country, something that will shake the currency markets substantially. As the fundamentals favor this climate, so the pressure on the Dollar will rise and move us towards an unstable global currency market.

It would be naïve to think that the globe could place national interests above global ones and place instability at home rather than abroad. So at some stage we do expect a very sharp fall in the US Dollar, but when it is in the interests of $ reserve holders to do so only! To precipitate the fall through a sudden large devaluation would bring a semblance of stability in place of massive currency turmoil. So it could happen!

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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