Gold is just about to challenge the $1300 mark for the third time this year. If the dollar breaks through the $1300 mark, and I believe it will convincingly, then the dollar will continue to weaken. In this article, I will analyze why the gold market will continue to soar.
Reasons for the Weak Dollar
1) The US economy is lethargic, unlike the rest of the world.
2) Asia’s rise is unstoppable and America is excluded
3) The global dominance of the US is falling
4) The mighty US dollar is not going to be the world’s major trading currency
Why the Gold Market Will Continue to Soar?
The Importance of Gold
The collapse of the Bretton Woods agreement and the later failure of the London gold pool saw the decline of the US gold stocks from 74,5% (21,828,25 tonnes) of all central bank reserves and 43,6% of estimated above-ground gold stocks in 1949 to 28,3% (9,069,7 tonnes) of central bank gold and 11,9% of above ground gold stocks in 1971.
As a result, monetary policy switched from the fixed parity arrangements centered on gold through the medium of the dollar to a propaganda effort aimed at removing gold from the monetary system altogether, replacing it with an unbacked dollar as the international reserve standard.
1) The purchasing power of the dollar and other major currencies measured in gold collapsed. In particular, from 1967 to now the dollar’s purchasing power compared to gold declined by 97,3%.
2) The US dollar lost its stability.
3) There has been an expansion of fiat money and bank credit.
4) The dramatic expansion of monetary inflation since the last financial crisis.
In the meantime, gold’s inflation is about 1,9% annually, of above-ground stocks. Considering the different rates of increase between gold stocks and the fiat unbacked state-issued currencies is what ultimately drives the price of gold. A higher gold price at a time of excessive fiat currency will trigger inflation to reaffirm gold’s role as sound money. This is viewed by the major monetary authorities as a potential threat to their currencies’ credibility.
There is no doubt there is a war against gold led by the US monetary authorities and the world’s major central banks. We have actually seen the expansion of unbacked paper gold constituting artificial gold supply in the futures and forward markets.
No matter what, gold remains the global hedge against inflation and the decline of the purchasing power of fiat currencies. We must not forget gold rescued the world’s financial system from collapse nine years ago.
Right now, there are significant GDP growths in China, Japan, the EU, and the UK with large export increases. Unfortunately for two main reasons, the US does not enjoy these benefits.
1) America’s shift toward trade isolation
2) China and Russia deliberately froze America and its money out of the Shanghai Cooperation Organisation (SCO).
Fiat Currencies and Gold Backed Currencies
Nevertheless, in the US, Japan, and Europe the population has experienced a long stable exchange value for their currencies. They’ve been pressured by their governments to use only state-issued currency and as a result, they do not regard gold as money. At the same time, they do not regard it as having any monetary role at all.
This is not the case in China Russia and the other SCO states where their populations regard gold as superior money to fiat currencies. The truth is that their fiat currencies do not have an established record of objective exchange value.
We can clearly see now the world is split in two. The governments of North America and Western Europe do not see gold as having a monetary role to play and the governments of Asia with Russia are on the exact opposite side and they actually accumulate gold.
The US Treasury still owns 8,133 tonnes of gold. They do not regard gold as money. Same as the Bank of England, the Bank of Japan, and the European Central Bank.
President Trump is not going to make America great again. The US economy is getting back on track. Increased trade tariffs against China remain on the agenda which in the end will hurt the American consumer. China leads the world’s economic growth, while America is left out.
Dollar vs Yuan
Right now the Chinese possess $3,08 trillion in foreign reserves most of them in US dollars. China uses its dollars to buy commodities, copper, iron, etc. If the dollar continues to decline, then China will have to abandon the dollar, because the dollar’s purchasing power measured in commodities will continue to decline.
In fact, the time is not far for China to ditch the dollar and replace it with a yuan backed by gold. Since the appointment of the People’s Bank with the role of acquiring gold on behalf of the state back in 1983, the Chinese never stopped buying gold. The gold that comes into China never comes out. The Chinese are still buying gold.
Yuan will be used predominantly for Eurasian trade, with China taking the necessary steps to control the oil market. Already SCO members account for 34.4% of the global oil supply. At the same time, China shows a preference for settling trade and business deals in yuan. The plan for oil suppliers like Iran is to sell their oil for yuan and then exchange their yuan on the Shanghai Futures for gold. Bare in mind that the yuan-gold contract exists and the next step will be the introduction of the yuan-oil contract.
More reasons to support my argument why the gold market will continue to soar.
There is no doubt that China’s strategy has been to eventually dumb the dollar and replace it with its own gold-backed yuan. Gold passed the $1300 mark and this is good news for the Chinese. This is also good news for the Russians who undermine the dollar too.
President Trump with the rest of the Western world seems to have no idea what is about to unfold. A gold-backed yuan with the ability to replace the dollar as the world’s trade currency will push the US dollar to weaken even more.
Gold has to rise to a level where the Chinese are prepared to set a conversion rate. China will definitely use its control over physical gold markets to achieve it when the time is right. In my opinion, China is now starting the move toward this objective.
For the investor, this is great news. It means gold will start playing the monetary role it used to. In order to do that there is only one way to unprecedented new heights for the metal.
Ps I hope my, why the gold market will continue to soar? post has been useful to you. If you still have any questions feel free to let me know in the comment section.