According to a man who is connected in China at the highest levels, the gold market is looking at déjà vu and the next price target is $2,200.
The Dollar is Not Forever
July 15 (King World News) – John Ing: To navigate this landscape, other central bankers have noticed, diversifying their reserves from dollars to hedge their bets against the slipping greenback, which recently hit a 4-month low on concerns that the Fed is monetizing their fiscal expansion. While it can be argued that money has no “intrinsic” value since the United States scrapped the gold standard system in 1971, the dollar is backed by the “full faith” of the government. However, with the mishandling of the pandemic, mistrust of big government, disparity in incomes and trade wars, faith in that government is lacking. History shows that this always ends badly.
US fiscal profligacy is not forever. Today the once mighty dollar’s hegemony, as a share of US dollar reserves held by central bank has fallen to 59.5 percent, the lowest in 25 years. The slide in part is due to the reduced international role that the United States plays, at only a quarter of the world’s gross domestic product. Because they are concerned about the US financial hegemony, Russia and China are diversifying from the dollar, buying gold. China has reduced its US reserves from $1.2 trillion to $1.05 trillion, a far cry from the peak at $4 trillion. Russia completed the Nord Stream gas pipeline to Europe and will take rubles instead of dollars. That is not all…
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Europe has unveiled the European Payment Initiative (EPI) to bypass the US payment oligopoly as a matter of sovereignty. The Biden administration will face a wider conundrum as it seeks to shift from fossil fuels to renewables to reach carbon neutrality. With Americans dependent on fossil fuels like petroleum, natural gas and coal, which accounts for almost 80 percent of their energy production, in the new green world, what happens to the dollar, exports and imports?
All this means investors no longer have confidence in placing most of their assets in dollars, particularly if those dollars are being inflated or affected by sanctions or climate. Also eroding their capital is the rounds and rounds of quantitative easing which flooded the market with newly minted Treasuries. As a result, international investors’ balance sheets have become top heavy with dollars, which are at risk because America’s twin deficits and red ink leaves it with rising debt, an inflation problem and a test of its credibility.
Déjà Vu
Between 1946 and 1971, the US dollar was backed by gold at the fixed rate of $35 an ounce. Then in 1971, the Nixon administration severed the gold link, devaluing the dollar because European countries demanded payment for their dollars in gold and the overseas claims on the dollar would have bankrupted the United States. While, the dollar is backed by the “full faith and credit” of the United States, instead of gold, the dollar is a fiat currency; a debt of the US government. Today, trillions of dollars are held by others because the US has become the world’s largest debtor. We believe America brings little creditability to the “full faith and credit” and the unprecedented stimulus has unleashed inflation. Tarnished, the dollar is undermined by America’s economic and financial mismanagement. It is overvalued without an anchor.
In practice this system allowed the United States to consume more than it produces and finances its everyday deficits with newly minted dollars. The question is now long can the world absorb these dollars? Once Britain was the wealthiest nation on earth and the British pound was the reserve currency for international payments. However, heavily in debt because of the Second World War, the pound was replaced by the dollar. Yet, before the dollar-led global order, history shows there was the Dutch guilder which followed florins and ducats. The dollar is not forever. No country can afford the deficits and debt that the United States is currently running…
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The monetization of deficits is inflationary. The pick-up in inflation took the Fed by surprise. So likely, the next outbreak and return to the Seventies level of inflation. Covid-19 stimulus has lifted debt to record levels. No wonder money has become worthless. There is too much and holding cash will cost you. Money is free. Sovereign debt today earns nothing or less than nothing for the privilege of lending money to the government. Why should investors continue to lend money to the government, when a significant portion of that debt yields less than zero?
Above all, we have a looming financial crisis and despite a near miss collapse in 2008, the financial system like our health-care preparedness remains woefully exposed. Corporate debt stands at $11 trillion, about half the size of the US economy. In a legacy of lockdowns, fiscal deficits will rise as well as debt, and the currencies of those debtor nations, which fund their deficits by printing money will fall. Here, America is exceptional. Inflation is rapidly moving higher. Its democratic institutions are under siege.
The Fed can’t afford higher rates with America’s massive debt load topping 115 percent of GDP. We believe the financial system is vulnerable to a major implosion as the United States digs itself into a deeper hole. Gold is an alternative to the dollar and the solution to those with too many dollars. The US has a serious problem with debt, deficits and the dollar. The cure, if there is a cure, will be painful. Gold is an asset that is both real, like real estate and liquid, like a currency. Today, it is a good thing to have.
Recommendations
Gold prices erased last year losses and within two months moved higher flirting with $1,900 an ounce because central banks were steady buyers, before slumping back on Jerome Powell’s sabre rattling of higher rates, in 2024. The stock market sold off 500 points, we believe gold’s pullback has created a new floor and we continue to believe gold’s next target is $2,200 an ounce. Gold demand remains strong with supplies limited.
Fundamentally nothing has changed. Gold cannot be created by a click, except by very expensive mining processes, and that in only small quantities. Central Banks continue to add to the gold reserves as China, Serbia, Kazakhstan and Thailand added to its positions. The new Basel III regulations (Rule 96) will limit central bank involvement in the risky derivative gold paper metal markets, putting a floor under prices. To the central banks, gold is an alternative to the dollar.
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