The Daily Market Report: Gold Could Gain Significantly in Weak Dollar/Growing Debt Environment


USAGOLD/Peter Grant/10-13-17

Gold typically trades inversely to the dollar, or whichever currency it is being measured against. USAGOLD founder and president Mike Kosares wrote in this month’s newsletter that many might be surprised to find that gold is up against every major currency this year.

Euro –– + 1.1%
Japanese yen –– + 8.0%
Chinese yuan –– + 6.5%
Swiss franc –– + 6.1%
British pound –– + 3.4%
Australian dollar –– + 2.1%
Canadian dollar –– + 3.2%
U.S. dollar –– + 11.5%
(As of 9/27/2017.)

Gold is up this year not just in dollars but in every major currency

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Gold market expert Egon von Greyerz sees the long-term downtrend in the dollar as one of his 10 Factors To Propel Gold 10 Fold.

The dollar has been in a strong downtrend since 1971 when Nixon ended the gold backing. This was a disastrous decision for the world’s financial system and for the US economy. It has led to a total collapse of the dollar and a financial system based on debt only. — Egon von Greyerz

I would suggest the downtrend in the dollar goes back much further, to the late-1800 and the end of the Spanish American War. However, most analysts benchmark 1913 and the advent of the Fed. The BLS’s own CPI Inflation Calculator shows that a 1913 dollar presently has 4¢ of purchasing power. In other words, the value of that 1913 dollar has devalued by 96% since the Fed came into being.

The price of gold in 1913 was fixed at $20.67. In the intervening years — and even taking into consideration the corrective consolidative phase since the 2011 peak — the price of gold has risen a whopping 6,189%.

Can the dollar’s value really erode further? Absolutely. Over time, that 4¢ in purchasing power will become 2¢, will become a penny and then we’ll be talking fractions of cents. It is the inevitable reality of a fiat currency in a net-debtor nation.

And what of that debt? Last month, Congress suspended the debt ceiling yet again, allowing our national debt to surge beyond $20 trillion.

When the debt ceiling is reinstated on December 08, you should have no doubt as to what will happen. Oh sure, there may be at least a little debate next time, but the debt ceiling will be raised or suspended once again. There is absolutely no reason to consider any other conclusion. Since the very first debt ceiling was implemented in 1917, there’s never been a level that hasn’t ultimately been exceeded. In it’s entire 100-year history, the debt ceiling has never been lowered.

If you asked me to bet the “over/under” on the debt in 2027, I would bet the over at $35 trillion. — John Mauldin of Mauldin Economics

I think the national debt could easily double in the next decade, so I’d have to take the “over” as well. The only way out government will be able to service such a massive debt load will be to weaken the dollar, as it has since President Nixon closed the gold window in 1971, ending convertibility of the dollar to gold.

“I directed [Treasury] Secretary Connolly to suspend temporarily, the convertibility of the dollar into gold or other reserve assets, accept in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.” — President Richard M. Nixon, August 15, 1971

Nearly 50-years later, I think we can all agree there was nothing “temporary” about it. Nixon also called concerns about devaluation a “bugaboo,” claiming that “the effects of this action will be to stabilize the dollar.” In reality, nothing could have been further from the truth. The dollar tumbled in value against other currencies and against gold.

At the time of Nixon’s speech, gold was trading around $43 per ounce. By January of 1980, it had reached a high of $850, nearly a 20-fold increase.

The dollar index has fallen about 9% YTD in 2017. The recent 3% corrective bounce seems to have lost momentum, suggesting the dominant downtrend is re-exerting itself. A weaker dollar into year-end bodes well for higher gold prices over the same period. This may be the last opportunity to buy gold at these levels.

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