For those of you looking at the price of gold in amazement, remember the old car bumper sticker of 2003, ‘please God, just one more bubble.’ One of the key reasons gold is rising in price, is because it is priced in dollars and the price of the dollar is and will continue to fall.
But why the dollar will fall is important for you to understand, whether you are in the UK or US or elsewhere. Americans buy products made outside America, more than the rest of the world likes buying products made in America. That means America forces upon the rest of the world about $2 billion daily of IOUs and assets. (What America pays the rest of the world in dollars to buy their goods). This is what causes the dollar to drop – the trade deficit.
But when the dollar falls, it makes American products cheaper for foreigners to buy and foreign products more expensive to Americans. That means the falling dollar should balance the trade deficit. Except it hasn’t. Trade deficits have increased with countries such as Germany and Canada despite their currencies appreciating against the dollar.
And this week you will have read that the Chinese sovereign wealth fund will be given another $200 billion to invest abroad. Why? How? Where did their money come from? Well, when Americans import more than they export, they are force-feeding dollars to the rest of the world – including China. So the Chinese have to invest that somewhere.
Essentially America sells what it owns in order to consume from a bit of what it owns or produces. Foreigners now earn more on their US investments than Americans do on their investments abroad. That means every time Americans produce, they are sending that abroad because in the past they consumed more than they produced. It’s a bit like working to pay a greedy ex-spouse. You are working for someone else. When you could have been investing that spend for your own good. In a way it’s a waste to your country.
So one of your best longer term bets is a fall in the value of the dollar. What of the Euro? Surely with all its problems you don’t bet the Euro over the dollar? Well actually, yes. One key reason is that the major growing economies with US dollar reserves in their central banks are selling dollars to hold more Euros. And even more reason the dollar will fall is that the Americans want growth and are willing to pay the price of inflation so will not raise interest rates as quickly as the Europeans. So you will earn more interest in holding Euros than dollars – another reason for the dollar to fall.
I am not saying of course it is a bad thing for the dollar to weaken – it is right. And so I expect before the year is out the Pound to buy $1.8.