The Objective for the Value of the US Dollar
In my last blog, I mentioned the relationship between gold and currencies. A lot of the artificial rise in the value of gold, is directly related to US Fed announcements and policies. I also discussed the rational for this and the attempt to assist the US recovery.
Understand Why You Have to Look at Gold
To understand why you have to be looking at gold, you have to look at how all governments are dealing with international trade which is governed to a large extent by how cheap or expensive a country’s currency is in relationship to all other currencies. Every country wants to export more, import less, and gain prosperity for their citizens as a result. Except now, the moves in every country are more pronounced as the US $ sinks. Worldwide the US is still the largest economic power and other countries try to move to protect themselves against this massive force.
Gold is the ultimate currency in the minds of many and therefore its price as denominated in currencies worldwide, is rising as the US $ falls. This is because people and governments worldwide trade in this commodity and hold a similar regard for gold. A person in the US, or in Hong Kong, or in Pakistan, or anywhere else hold the same regard for gold. If you can buy an ounce of gold for the same amount in Chinese currency as you could last week, that becomes the norm. But realize what happens if you can buy $100 US this week and only $99 US next week for the same amount of Chinese currency. By simple mathematics, the price of gold in US $ rises.
Therefore if you live in an economy denominated in US $, you have to have gold because it will go up in value if the US $ falls in value. Pretty simple isn’t it?
Add to that, the regular upward pressure on the price of gold and the answer is pretty obvious. As long as the US $ remains weak, the price of gold will rise.
Some Comparisons of Purchasing Power
Quote last week from MarketWatch: — “The tasting menu on display outside the Japanese restaurant at the Westin Hotel in Tokyo had all the treats: fine rare tuna sashimi, fabulous beef and wine pairings for each of the handful of items. Then I saw the price: more than 53,000 yen, or more than $650”
Compare that to what a high end meal in New York would cost. It would seem expensive to North Americans, but cheap compared to Tokyo. As the Yen rises and the US $ falls, items priced in Yen get more expensive to us.
The Currency Wars
This is the front line of the currency wars, where quantitative easing, smothered interest rates and an absurd expectation that a weak dollar will lead to a U.S. economic recovery combine to make U.S. dollars a laughingstock. The Federal Reserve is trying to save the U.S. economy from sinking into a 1930s-style depression. But the currency war the Fed and the Treasury have started across the world — flooding emerging markets with dollars and berating China for essentially keeping the weak currency they’d like to have themselves — couldn’t do less for American economy.
The Hong Kong Dollar
The Hong Kong’s dollar is pegged to the U.S. dollar at a little less than 8 to 1, as the U.S. dollar weakens, so does the value of the Hong Kong dollar for anyone looking to spend it across the border in China or elsewhere. That’s helped fuel the property boom in Hong Kong by attracting more Yuan and raised questions about the viability of the 27-year-old peg.
Distortions abound around the world. A weak US $ has worldwide unexpected results.
Australia
In Australia it’s no different. Last week’s surge in the Aussie dollar to parity against the greenback for the first time since 1982 generated great pride in the commodity-rich country, even though its effect on the economy is somewhat neutral.
China
Each country feels different about the impact of the weak U.S. dollar on its economy, but the common denominator is that just about everybody expects it to end badly, à la the Asian currency crisis of 1997.
The move by China to raise lending and deposit rates earlier in the week, even though a minor maneuver compared with really letting its currency appreciate, stopped the global commodities rally in its tracks and sank equities around the world, if only for one day.
One other matter to consider. The US thinks that the Chinese currency is undervalued by roughly 20%, thereby giving Chinese manufacturers a 20% advantage. One additional fact – China holds massive amounts of US dollars. What the US is saying is that China should take a 20% loss on all the US dollars and investments that it holds.
What would you do if somebody said – “Lose 20% of all of your assets!”
