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Gold vs. Dollar: Will The Race Ever End?

May 13, 2010 by  


By Dr. Atif Khan, Ph.D.      

www.sunshineprofits.com

The full version of our analysis (with comments particularly valuable for Precious Metals Traders) is available to our Subscribers.

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Over the last few days, there has been a steady complementing studied between the gradual decline of Dollar and the correction of Gold rates. There has always been a debate regarding the inherent value of the two. The dollar has always been traded, compared and exchanged for and against Gold. Gold is the evergreen king of the precious metal commodity and its trading has revered over changing streams of different eras. Since the abolishment of Bretton Woods System of IMF in 1971, Gold has been replaced  with Dollar; due to this replacement many further effects has been triggered, adjustments and movements have been drawn, that reciprocate between the two.

The fundamental reason given for abolishment of Gold standard was based on exchange deficits that were causing challenges to Dollar in the wake of imports and exchange rates in comparison to locally produced consumption.

Over the decades the movement of Dollar has corresponded in variant terms with reference to economic and trade policies in differing speculative environments. The fundamental reason behind substituting the Gold standard was also to slash the impacts of speculative currency trading in the international forex markets reacting on the valuation of Dollar.

Impacts of Monetary Inflation:

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Another valid reason may also be the drifts in the economic environments; IMF and World Bank regulations and their responsive effects on the US economy. The Capital based Trade Market Economies have also exhibited fluctuations in the wake of diverse political events such as the formation of independent Russia, Fall of the Berlin Wall, formation of European Union, oil discovery in Middle East, the rising tension in Far East because of North Korea, Euro launch, and the steady emergence of markets such as India and China.

US home based policies also displayed a progressive change in the economic scenarios with respect to wars, governmental stance and most importantly the recent economic meltdown. The extensive printing of the currency in from of Euro and Dollar also had depleted effects on the consumer power of purchase and radically visible inflation all over the world and particularly in G7 countries.

Dollar being the standard is highly dependent on the prevailing national debt, imports, inflation and the rising cost of living. Unemployment, bail-outs, tax and health care reforms also had exorbitant influence on the face value of dollar in general.

But the question remains; where does it all lead to? Is it all based on speculative investments or all these factors are predominantly acting for the virtue of Gold. The relationship between the two has always been preempted under immense implicative measures. The impact of one currency (Dollar) over the other commodity (Gold) has always been a reason of criticism against each other from siding speculators of both fronts.

Gold was made standard in 1945 to stabilize the global international monetary system so that there is fair assimilation of national economies based on indicators such as GDP, GNP, Per Capita Income, Reserves and BOP (Balance of Payment). Gold being the common global standard had less effects on its value due to the inherent perception and that of various economies competing to match on its standardized worth.

Dollar Value:

The national economic policies since 1971 did not only have weakening outcome on dollar value but it also advanced the process of devaluation further when economies such a EU and USA started printing more currency to stabilize the wear and tear for the adjustment on domestic level.

Gold on the other hand was accumulated and stored in its actual worth and the steady weakening of currency value led to its appreciation. Since gold was always considered on its inherent worth, the dollar on the other hand was adjusted based on non-regulated and un-supervised measures such a Lehman crunch and the bail-outs implicating tax-reforms, inadvertently tarnishing the possibility of domestic growth and further posing the challenges such as unemployment, national debt and severely suffered consumer power of purchase.

All these side effects that contributed towards the loss of dollar had contributed towards the gain of gold value. Just like the political and economic policies had impacted Dollar value, similarly weakened dollar value added on the worth of stable and independent gold rates.

Both depression followed Gold as the emerging market standard. In 1945 it was mutually decided between 44 signing nations that Gold will be kept as a standard of international monetary exchange based on the fact that it had always been one since the recorded history, to stabilize equitable and even distribution of wealth in world order. Being replaced by paper money and many stimulus packages, has only appreciated Gold’s worth rather than sustaining any inadvertent effect of the currency based decline.

Power of Purchase:

This recession too has forecasted the emergence of Gold once again as the prominent market dominant force, a commodity, a precious metal, a globally fixed and accepted standard. A tool to regularize the unevenness of wealth distribution, gold has further captured the limelight due to its movement along the path of Dollar and its resilient stability overcoming all the posed risks and challenges in the frequently shifting economic scenarios.

Economic analysts all over the world have been forecasting a trickle up effect of Gold against the paper money, they believe in storing and retaining the Gold in various forms such a biscuits, bullion and numismatic coins to cover up against the non-recovering irresponsible scenario of dollar.

Another vital interest is also based on the security expenses, war deficit and the foreign investments in US, that are based and biased on off shore interests and agenda. Due to high cost of resources, all the major producers are now creating goods of mass consumption in China. Garments, automobile, electronics and even Gold and Silver mining, China is storing resources (including copper) while at the same time generating supplement resources from their foreign direct investments and offshore exports. The dominant factors encapsulating the US economic scenario is leading to further devaluing the dollar as it is not purchasing anything but accumulating debt and thereby further worsening the trade objective that was meant to achieve through the substituting of dollar from gold in 1971 by President Nixon.

These policies have thereby further strengthened precious metals as the counter-effect of sliding dollar movement and non-recovering effects of leading economic indicators.  Dollar being the representative currency of US markets also stand as the major determinant of the bi-lateral effects it narrows within the US and world economies. This correlation creates Gold as the buffer medium that gets profited due to the short comings of its competition against the dollar.

Real Money Dollar or Gold?

Some economic authorities considers Gold as the real money, the reason being it does not devalue and has little reflection of the policy scenario on its power of purchase and hence depicts the real value worth of economic prosperity and national hard work. The growth and decline corresponds well because it only changes it impact on the currency valuation when there is an actual change in figures of Gross Domestic Product.

The policy of providing stimulus through printing paper money is another crucial factor that strengthens the worth of Gold in international markets, European and United States do so to provide leverage to the deteriorating conditions of unemployment and improving the standard of living but the reverse occurs when in the long term scenario the trade deficits start effecting the currency and the average price of goods increase in form of inflation and rising cost of living.

Current trends future events:

During the last few weeks and since past few months; the correction in Dollar rates has led to steady shift in the investors’ confidence in the currency. Though the unchanged interest rates announced by FED (until the economic health is retained) is good for short term as there has been a betterment of at least 10% in unemployment ratios. This marked improvement has also helped in regaining the speculators confidence a bit, who had witnessed the steady improvement in Dollar value during the 2009 risky era.

The current move in Dollar has since given speculative markets an incentive of making profits from Dollar through trading in other currencies, though the speculated change in interest rates halted by FED will become another reason for the next speculation related to the improvement in Euro against Dollar for the target 1.5 figures. Due to the approach of Euro to 1.5 figures also reflects an upswing in the position of global economy and thereby an eventual escalation in interest rates. Norway is one of those early birds who showed a recent marked increase in interest rates from 1.5 to 1.75%.

BRIC economies (Brazil, Russia, India, China) play a major role in global economic scenario because they contribute 27% of the world GDP. Due to this mammoth power they have a tendency to grow more annually (more than 7% GDP) than any other westerner economy, an average of 2% GDP growth is recorded in G7 countries.

Therefore their effects are very dominant on Gold valuation, their respective currencies have depicted various cycles over the last decade until their current emergence. 

Various strong global currencies have also reflected changes because of the weakening dollar stance, the three major ones are Chinese Yuan, Russian Ruble and Indian Rupee.

Brazil has been steady and thereby no marked upward or downward change is speculated.

Despite being proclaimed to show an appreciation against the dollar, these sudden changes can also have downturns because the currency trading in these economies is very thin and may have such very short term impressions.

The BRIC economies play a major role of change agent in context of stabilizing the worth of Gold. Due to the stable nature of Gold the reserves figures also increase, following chart will further establish this perspective.

Many economists are claiming that BIRC is just an artificial association of four very different economies and it is very hard for them to survive sitting in a common vessel. Economies such as Brazil has also been blamed for artificial capital but the truth remains that steady political climate and terrorism free economy has led it to become one of the major hubs of global business.

“Our main goal today was bolstering our co-operation, tackling the aftermath of the economic crisis, supporting the international financial institutions and creating a more democratic and fair international system in general”, Dmitry Medvedev, Russian President stated during the BIRC Quartet for the Multi-Polar Financial Structure.

“I think Russia is playing a very important role in this grouping, and in many respects it is the leader amongst the BRIC countries-currently it is the only BRIC country without capital accounts restrictions, all other countries of this group have such restrictions”, says Yaroslav Lissovolik, Chief Economist, Deutsche Bank.

“What they are doing is let’s start from inside, this means reforming the Bretton Woods institution. The IMF and World Bank”, said Pepe Escobar, Analyst Asia Times. BRIC economies have laid a solid foundation on breaking the monopolistic environment of dollar under the trickling effects of recovering US economy making the entire world getting influenced by its recent jolts. Stock exchanges, commodity and capital markets have been suffering for long and facing the turmoil due to the unsupervised measures in the capital markets of US. As an opportunity cost gold has evolved again with poor countries working up to compete for multi-polar world order. BIRC has an accumulated reserve of 3 trillion dollars which is the fruition of generating cross exchange profits of the devaluing dollar.

What this means is that soon world order is going to revive Gold as a standard as it was before 1971. A correcting US economy will have little growth in from of GDP to influence the solution that is reverting back to Bretton Woods system revolving around  Gold.

Gold and Dollar are going to further influence each other till the old Bretton Woods system is re-established, it is in the pipeline and part of Multi-Polar Financial World Agenda. How the dollar is still going to catalyze the process for faster or slower; will only be unleashed with the passage of time. Till then the speculative market are going to reap these benefits along the movements of Dollar and its corresponding effects on the appreciating worth of Gold.

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