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Alasdair Macleod: Valuing gold in a world awash with dollars
By Alasdair Macleod
GoldMoney.com, St. Helier, Jersey, Channel Islands
Thursday, July 26, 2018
In this article I point to the pressures on the Federal Reserve to moderate monetary policy, but that will only affect the timing of the next cyclical credit crisis. That is going to happen anyway, triggered by the Fed or even a foreign central bank. In the very short term, a tendency to moderate monetary policy might allow the gold price to recover from its recent battering.
Unlike the last credit crisis when the dollar rose sharply in a general panic for safety, on the next crisis, the dollar is likely to fall substantially. The reason is that foreign ownership of dollar investments (typically in U.S. Treasuries) appears greatly overextended, and an additional $4 trillion of liquidity is in the wrong (non-U.S.) hands. This is likely to be unloaded during a general credit crisis, driving the dollar lower.
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Domestically, in the next credit crisis the Fed is certain to support the banks, provide finance for a runaway government deficit, and stabilize the private sector by injecting further liquidity into an economy already awash with dollars. Therefore, not only will the dollar fall on the foreign exchanges, but its purchasing power in the hands of American citizens seems certain to fall as well.
And finally I demonstrate how fluctuations in the quantity of paper gold makes a nonsense of the conventional supply and demand approach to analyzing and forecasting gold price trends. Futures and forward markets have deflected demand from physical metal, a situation that depends on confidence in the dollar as a stable currency being maintained. Only a marginal shift away from paper towards physical gold will undermine the whole paper-gold system. ...
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