The Strange Case Of The Falling Dollar – And What It Means For Gold

This article was written by Brandon Smith (the Editor of Alt-Market.com) and originally published at Birch Gold Group.

Trillions of dollars in uncontrolled central bank stimulus and years of artificially low interest rates have poisoned every aspect of our financial system. Nothing functions as it used to. In fact, many markets actually move in the exact opposite manner as they did before the debt crisis began in 2008. The most obvious example has been stocks, which have enjoyed the most historic bull market ever despite all fundamental data being contrary to a healthy economy.

With a so far endless supply of cheap fiat from the Federal Reserve (among other central banks), as well as near zero interest overnight loans, everyone in the economic world was wondering where all the cash was flowing to. It certainly wasn’t going into the pockets of the average citizen. Instead, we find that the real benefactors of central bank support has been the already mega-rich as the wealth gap widens beyond all reason. Furthermore, it is clear that central bank stimulus is the primary culprit behind the magical equities rally that SEEMS to be invincible.

To illustrate this correlation, one can compare the rise of the Fed’s balance sheet to the rise of the S&P 500 and see they match up almost exactly. Coincidence? I think not…

Another strangely behaving market factor that has gone mostly unnoticed has been the Dollar index (DXY). Beginning after the global financial crisis in 2008, the dollar’s value in reference to other foreign currencies initially moved in a rather predictable manner; collapsing in the face of unprecedented bailout and stimulus programs by the Fed, which required unlimited fiat creation from thin air. Naturally, commodities responded to fill the void in wealth protection and exploded in price. Oil markets in particular, which are priced only in the US dollar (something that is quickly changing today), nearly quadrupled. Gold witnessed a historic run, edging toward $2,000.

In the past few years, central banks have initiated a coordinated tightening policy, first by tapering QE, then raising interest rates, and now by decreasing their balance sheets. I would note that while oil and many other commodities plummeted in relative value to the dollar after tightening measures, gold has actually maintained a strong market presence, and has remained one of the best performing investments in recent years.

Something rather odd, however, has been happening with the dollar…

Normally, Fed tightening policies should cause an ever-increasing boost to the dollar index. Instead, the dollar is facing a swift plunge not seen since 2003.

What is going on here? Well, there are a number of factors at play. First, we have a growing international sentiment against US treasury bonds (debt), which may be affecting overall demand for the dollar, and in turn, dollar value. For example, one can see a relatively steady decline in US treasury holdings by Japan and China over the course of 2016, with China being the most aggressive in its move away from US debt:

We also have a subtle, yet increasing, international appetite for an alternative world reserve currency. The dollar has enjoyed decades of protection from the effects of fiat printing as the world reserve, but numerous countries including Russia, China, and Saudi Arabia are moving to bilateral trade agreements which cut out the US dollar as a mechanism. This will eventually trigger an avalanche of dollars flooding into the US from overseas, as they are no longer needed to execute cross-border trade. And, in turn the dollar will continue to fall in relative value to other currencies.

There is also the issue of coordinated fiscal tightening by central banks around the world, with the ECB and even Japan moving to cut off stimulus measures and QE. What this means is, other currencies will now be appreciating in terms of Forex market value against the dollar, and in turn, the dollar index will decline further. Unless the Federal Reserve acts more aggressively in its interest rate hikes, the dollar’s decline will be brutal.

Finally, we also have the issue of nearly a decade of Fed stimulus that has gone without audit (except for the limited TARP audit, which shows tens of trillions in money/debt creation). We truly have no idea how much fiat was actually created by the Fed – but we can guess that it was a massive sum according to the seemingly endless rise in equities from a point of near total breakdown, funded by quantitative easing and stock buybacks. You cannot conjure a market rebound merely with debt. Eventually, that currency creation and the consequences will have to set a foot down somewhere, and it is possible that we are witnessing the results first in the dollar, as well as the Treasury yield curve, which is now flattening faster than it did just before the stock market crash in 2008.

A flat yield curve is generally a portent of economic recession.

I believe that this is just the beginning of troubles for the dollar and for US bonds. Which raises the question, how will the Fed react to a dollar market that is so far completely ignoring their tightening policies?

Here is where things get interesting. Throughout 2017, I warned that the Fed would continue to raise interest rates (despite many people arguing to the contrary) and would eventually find an excuse to increase rates much faster than previously stated in their dot plots. I based this prediction on the fact that the Fed is clearly moving to pop the enormous fiscal bubble it has engineered since 2008, and that they plan do this while Donald Trump is in office (whether or not Trump is aware of this plan is hard to say). Trump has already taken credit on several occasions for the epic stock rally, and thus, when the plug is pulled on equities life support, who do you think will get the blame? Definitely not the banking elites who inflated the bubble in the first place.

Even the mainstream financial media has admitted at times that Trump will “regret” his campaign demands that the Fed hike rates and stop pumping up stock markets, as he will be inheriting a fiscal punch in the gut.

The Fed, as well as the mainstream, have also planted the notion that the Fed “will be forced” to raise interest rates faster if the Trump Administration pursues its plans for Hoover-style infrastructure development.

But, on top of this, the “problem” of the falling dollar also introduces a whole new rationale for speedy interest rate hikes. I believe that soon after Janet Yellen leaves as Fed chair and Jerome Powell transitions in, the Fed will begin an exponential increase in rates and will speed up their balance sheet reductions. And, they will blame the unusual decline in the dollar index as well as falling Treasury demand as the cause for more extreme action.

Powell has already backed “gradual rate hikes” in 2018, and, a few members of the Fed expressed a need for “faster hikes” in the minutes of the last meeting in December. I predict this sentiment will expand under Powell.

A small number of Wall Street economists are also warning of more rate hikes in 2018, and that this could cause considerable shock to the virtual stock rally in play right now.

That might be the Fed’s plan. The central bankers need a scapegoat for the eventual bursting of the market bubble that they have produced. Why not simply allow that bubble to finally implode in the near term, blaming the Trump administration and, by extension, all the conservatives that supported him? To do this, the Fed needs an excuse to hike rates swiftly; and they now have that excuse with the dollar dropping like a stone (among other reasons).

But how will this affect gold?

So far, gold has actually spiked along with Fed rate increases, which might seem counter intuitive, but so is the dollar falling along with rate increases. I do think that there will be an initial and marginal drop in gold prices if the Fed increases the frequency of rate hakes. That said, eventually reality will set into stock markets that the party is over, the punch bowl is being taken away, and Trump’s tax reform will not be enough to offset the loss of access to trillions in cheap fiat dollars from the central bank.

Once stocks begin to collapse in the wake of Fed hikes and balance sheet reductions (and they will), and uncertainty in the fate of the dollar swells, gold will bounce back stronger than ever. In the meantime, I would treat any drop in precious metals as a major buying opportunity. Gold is one of the few assets that always does well during times of crisis.

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18 Responses to The Strange Case Of The Falling Dollar – And What It Means For Gold

  1. Steven R says:

    Won’t the trillions of dollars being repatriated back to the US from the corporate tax reduction affect this? One would think it would increase the demand for dollars and bolster its price.

  2. Davy the tinman says:

    90% of my current transactions are in non- cash vehicles. Mostly CCs or ACH. I write less than one check a month. Is crypto the new world’s reserve currency? Despite its long history will gold fade from trade and become just an industrial metal? If you know the answers please shoot me an email. Meanwhile I’m paying down debts and buying silver.

  3. Montana Rancher says:

    Great article until the end. The price of silver and gold are highly manipulated, big banks are using paper contracts to move the price at will and nothing that happens with interest rates or T-bills is going to change the price of gold until the manipulation is stopped. Period.

    IMO they hold the physical price just above the cost of production so the miners keep supplying.

    Currently for every ounce of gold in the world there exists 5 ounces of silver.

    Historically silver vs gold exchange rate was 15:1.

    Currently the exchange rate is about 70:1

    The numbers don’t add up, but IMO if you have extra money to invest, silver looks like the best deal.

  4. Ned2 says:

    Silver, I think, is the big sleeper here.
    It’s easy to do business with, some of us are already using it for trade transactions, and the historic value ratio is very skewed.
    Gold is hard to obtain in small denominations/coin size.
    But, an ounce of metal will always only be worth what someone else is willing to trade for it. Trying to assess it’s value in dollars is misleading.

  5. patientmomma says:

    Question for the group. Is the following over simplification? When the petro dollar dies, recession/depression begins…because stock market crashes, businesses fail, prices rise, unemployment goes off the charts, foreclosures and repos begin again, people have no place to live, no way to get food, riots take over the cities and USA becomes Venezuela? What did I miss?

  6. JA says:

    I used to be worried about investments. But the cycle will repeat itself and best to have an offgrid approach to sustainment. JWR was right all along. If you have grocery shelves clearing out in cities then you have your garden and food stock. When the Powers to Be shut off utilities to submit the Subjects you have your well water with solar and septic and maybe propane for a while. When a police or paramilitary action rises such to the likes of Venezuela then you have your arms and stock of peripheral devices (scopes, wind meters, body armor, camouflage, night vision, et al. ) to become more military like on the playing field.

    Having said that, everyone should be self sufficient before they get into stocks and bonds and real estate investments and the like. You’ll be much more hedged for a crisis than you think and sleep well at night.

    We will be getting back into our routine of investments once our three year hiatus stops upon building our peace of mind all off grid. It really does take that long to off grid for those of you thinking a bug out bag to the national forest is all you need to hedge against the zombies.

    God bless and thanks for sharing.

  7. Don Williams says:

    I disagree with Brandon’s last statement “Gold is one of the few assets that always does well during times of crisis.”

    1) In a deflationary depression, gold does poorly and long term Treasuries do well. Look at what gold did in the 2008 crisis: Fell from around $1000 an ounce in the spring to $750 by Jan 2009.

    2) US tax policy is very hostile to gold and other collectibles.

    3) Think your gold is secret? How? Any purchases of more than $10,000 in cash trigger Patriot Act reporting. Checks or credit cards payments to gold dealers are self-reporting.

    4) When you sell, you have to report capital gains. Golds sales are taxed at the maximum 28% rate (https://www.irs.gov/taxtopics/tc409 ).

    5) Take it overseas? Any assets over $10,000
    have to be reported to Customs. And let’s face it — the US is the biggest GDP on the planet.
    With nukes and by far the most powerful military. If we go down we will take the rest of the world down with us.

    6) And, of course, in the Great Depression Franklin Roosevelt banned private possession of gold. Think current government will be more respectful of private property rights?

    According to the Bill of Rights, FDR should not have been able to take people’s gold without paying a fair market rate. But guess who set the sales price?

    Now guess which pack of judicial prostitutes endorsed setting the sales price in that matter. with the truly brazen sophistry that since the government had banned private ownership of gold then the gold was obviously worth very little and payment of a few cents on the dollar met the Constitutional requirement of “no taking without compensation”. heh heh heh

    Read ’em and weep, rubes.

    • Steve says:

      Donny, I think Brandon’s last statement “Gold is one of the few assets that always does well during times of crisis.” might have been more simple than you realize.

      Clearly there is always a better investment in the short term. Technically gold should have a zero percent return long term. Long term it’s a store of value. Gold buried under your steel fence post out back can’t be destroyed by a personal, corporate or national debt bankruptcy.

      In a sense I guess you’re right. If I was a multi-millionaire and wanted to evade taxes and hide large gold purchases it would be difficult but at some point you just need to recognize there is nothing more you can do. I personally don’t worry about any FDR type actions because most gold is held by ETFs and banks. If the feds want gold they will take that. As I understand it, even FDR didn’t send out goons to everyone’s homes. They just trusted the rubes to do as they were told.

      • Iggy says:

        The preponderance of liquid wealth in this country is in IRA’s and 401(k)’s. They know where it is and it’s composition. Very easy to grab.

  8. Skip says:

    The idea that the dollar is going to be worthless is not based on facts.
    The US dollar right now makes up 70-80% of all global trades. No other currency comes close to the size of the US dollar in the world.

    We are also the biggest dog in SDR’s.

    The idea that subversives in the Federal Reserve are going to purposely crash the global economy is nuts. They are a private institution not government and they like profits.

    I see the next economy crisis will create a strategy for the US to go cashless. That single act stops all sorts of illegal trade since all transactions can be tracked in real time.

    This matches Scripture too since in the End Times no one can buy or sell without the mark. This demands a high tech system not a barter system.

  9. Don Williams says:

    See Nortz v United States:
    http://caselaw.findlaw.com/us-supreme-court/294/317.html

    Note also how in Perry v United States, the government not only took the gold of the people — it also welched on the Treasury bonds it owed them. The Supreme Court agreed that that had happened but refused to order relief. SO much for the sacred validity of the public (i.e, federal ) debt.

    Franklin Roosevelt publicly stated that he would IGNORE a Supreme Court order re gold clauses if it went against him. And the Court backed down with truly crooked reasoning.

    https://scholarship.law.ufl.edu/cgi/viewcontent.cgi?article=1026&context=flr

  10. ron Stephens says:

    So in the mist of all this uncertainty and guess work where would you put $20,000 to $30,000 in cash now so as to protect it but also to be able to use on short notice

  11. Gary Long says:

    Moral of the story: Thus predictably ends any system based upon fraudulent, fiat-currency, Ponzi schemes. Any way you dress it up, it’s all still a value-fiction, which people have been conditioned to believe (Full Faith and Credit) actually exists beyond the imaginative musings of an “elite” criminal class who have successfully played this “game” and have absorbed real world assets (including fruits of labor) with zero real investment or liability on their part.

  12. Skip says:

    The strategy of protecting $30,000 and yet to have access quickly than some parameters must be known.

    If losing principle was a non starter than the $30k would have to be in cash and not in a bank or stock market.

    To store such amount would difficult but not impossible.
    A good home safe would do the trick but not all of it.
    I would divide it up in 1/3’s with $10k in safe, small bills. Another $10k would be stashed in various locations as One purposes.
    Now if you want to travel, get $5000 in Euros and Pounds but that would be an individual choice.

    One could have the last $5000 in gold— 1/4 Eagles.

    You would have diversified the funds and you could be mobile.

    Now you know all money has a magnetic strip in it and it can be detected.

    • Steve says:

      Skip, so you would keep $5,000 in gold, $5,000 in Euros or Pounds and $20,000 in US cash?

      Not a terrible plan but it’s a little dollar heavy for my taste. If I was in the “grab and run” mindset I would probably exchange $10,000 of the $20,000 in US dollars for $5,000 in silver and maybe $5,000 of Chinese or Japanese currency.

  13. Skip says:

    Steve, the reason it’s dollar heavy is just the scope of US dollars influence.
    Most European nations accept green backs. Canada does also but will not take a Euro or British Pound.
    The 1/4 gold Eagles could be sold anywhere there is a coin shop. But you still have to sell it to get fiat currency in that nation.

    As for China or Japan, their debts are higher than the US and to far away to make travel in the event of crashing markets.

    Just check and see how many nations that do not trade in US dollars. It’s not that many and they are 3rd rate nations with Uber corrupt leadership.

  14. Don Williams says:

    I am not licensed to give financial advice –following is just my opinion.

    1) If you want money overseas, then it seems best to move it there now. Whether to have it show up on IRS records or not is left up to the reader. But obviously moving it there now gradually is easier than trying to move it across international borders in a crisis. In the later case, I don’t see many alternatives to swallowing some diamonds. Hopefully , not zircons some crook offloaded onto you.

    2) I don’t understand the idea of putting the money into foreign banks. Either they pose a gangster risk (see Cyprus) or they are rent boys to Washington. Whereas precious metals and currency can be buried in the ground with no one in the foreign country the wiser.

    3) I kinda like Harry Browne’s idea of keeping speculation funds separate from wealth that must be preserved and his idea of preserving wealth with the Permanent Portfolio: 25% cash/short term Treasuries , 25% gold, 25% stocks and 25% long term Treasuries. The idea being that adverse events that drive down one asset class will lift up another. Inflation may drive long term bonds down but will lift gold. Whereas long term Treasuries with high security and guaranteed income do well in a depression with deflation (falling prices.) Stocks do well if prosperity (including the false kind of government bailouts) occurs. PRPFX is a more complicated version of this:

    https://en.wikipedia.org/wiki/Fail-Safe_Investing

    https://en.wikipedia.org/wiki/Permanent_Portfolio_Family_of_Funds

    I admit I wince at the idea of putting money into the current stock market but as someone once joked, the market can stay irrational a lot longer than you can stay solvent.

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