Do a search for “U.S. Dollar is in Trouble” on Google and watch what comes up. 127 million hits. From CNBC to Reuters, Rense to ZeroHedge, mainstream sites to unconventional sites alike you can clearly see the amount of rhetoric that is our there regarding the possibly of the US dollar weakening. What you do not see too frequently are articles deliberating the notion of the U.S. Dollar strengthening. Why is that?
Too most of our readers it will be self-evident but to those of you that are still wondering what the future path of pricing might be for gold and silver bullion then let me take a moment to edify this topic.
The U.S. government, after winning World War II for the Allies, was very convincing. It told central banks around the world that they should hold the U.S. dollar as their reserve currency instead of gold, based on the idea the U.S. dollar would be backed by gold. Only limited amounts of U.S. dollars could be printed, because the currency was tied to gold bullion. The more money you wanted to print the more bullion you would have to use to back the currency. This model was very simple and ingenious, in my opinion, and of course Central banks bought into the idea.
Unfortunately, a few decades down the road, gold was decoupled from the US dollar in 1971 (thank you, President Nixon). The US government stopped allowing foreign banks to redeem US dollars for gold. This was when the gold standard ceased.
There seemed to be little concern about excessive monetary expansion at that time. In the 1970’s the U.S. economy was actually prospering and the debt levels were manageable. They had the strongest currency and the largest and most powerful military. In 1973 OPEC adopted the US dollar as its payment system hence the “petrodollar” was created and further strengthen the US dollar as the world’s reserve currency. Therefore it made sense for Central banks to also follow suit. As a result the whole world adopted a fiat currency system. In other words a system that was not backed by anything. This allowed all monetary systems to expand the amount of currency without any controls especially the US.
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Some 40 years have now passed since that time and there have been boom bust cycles in the US. The US is no longer the overwhelming favourite to win the race either. Their balance sheet is nowhere near as pretty as it was in the 1950’s or 60’s. The US dollar has become “unglued” from gold and the ever rising debt and never-ending creation of US dollars is causing some countries to do an about face on their policy of owning US dollar-backed reserves.
Via the Federal Reserve Bank of St Louis statistics we can now see that in fact, since 2008, the US Government debt (Average 11% YOY) is rising 360% faster than their GDP (Average 2.39% YOY). Also see the Zero Hedge article in our Reading 101 section.
In addition to this blatant problem the rest of the world is now changing gears also. Central banks that once supported the notion of US debt ownership and used US treasuries as an imperative part of their reserves, selling gold bullion off and trumpeting the ingenious ways of the world’s largest economy, have more recently, since 2009, begun to slow their buying of U.S. treasuries and in fact have been net buyers of gold bullion for the past four years.
More recently the ECB and The People’s Bank of China begun a bilateral currency swap line. This line allows these two entities to exchange currencies freely. This is happening in the context of the growing need to step away from the U.S. and to act more independently with other of the world’s largest economies. More of this will happen as we move forward and swap arrangements like this and others you may have heard about will continue to become more of the norm, intended to backstop liquidity and reassure local banks the continuous provision of additional funds should it be needed. All of this is happening without the U.S.… oh oh!
Unfortunately we hear very little about these facts in the mainstream financial media simply because this is not good news for the too big to fail institutions and the way of life of the elitist suits in the U.S. itself.
What we hear is that the U.S. economy is improving and that simply not the case. The mainstream financial media, from Bloomberg to CNN, Wall Street Journal to NY Times, seemingly are addicted to feel good stories about meaningless job, housing and other statistics that fall short of making the grade. The truth is that as long as currency is being created the U.S. stock market will continue to rally. Take away the currency expansion and watch the flames spread fast.
The pillars of this U.S. economic rebound are made of paper and are not likely to weather the next storm because paper does not like getting wet. However gold and silver bullion have survived for thousands of years. Perhaps it is time we talk to the engineers about using new pillars!
Darren V. Long is Senior Analyst with Guildhall Wealth Management Inc. Darren is a speaker, writer and financial commentator on gold, silver and the economy. He can be heard weekly on “The Real Money Show” on 640 and 740 am radio in Toronto discussing all facets of the precious metals markets. Listen to replays of all shows on iTunes.
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