The rise of the U.S. Dollar is undoubtedly the story of the last months. The announcement of the U.S. Fed to keep rates at zero longer than expected is undoubtedly the story of the week. As a consequence of that announcement the U.S. Dollar initially fell hard from 86.80 points to 85.05 points, while gold has reacted positively with a significant bounce off its long term support at $1,180.
What does all this mean for investors (not for traders)?
It appears that gold could go higher from here. Why? Because the initial reaction of gold on the news of lower interest rates seems to be bullish. After the U.S. Fed announcement, the U.S. Dollar seems to be willing to move higher ALONG WITH gold. If this trend continues, it is an important trend change; it would also indicate that gold is more sensitive to higher rates at this point in time than a rising dollar.
As for the dollar, it seems that the greenback wants to move higher, even in the midst of a trending de-dollarization. Before looking at “why” this is ongoing, let’s first consider “what” is going on.
Readers probably have read earlier this week that the South Korea’s central bank announced that South Korean domestic deposits have reached 16.19 billion Chinese renminbi in July this year, a 55-fold increase from the same period last year. Moreover, South Korean banks calculated that the proportion of foreign currency deposits held in renminbi rose from 0.4% at the end of 2012, to 13.7% at the end of 2013, to an impressive 25.9% at the end of July.
Another sign of the dollar’s de-dollarization is the recent announcement of the Chinese central bank which announced direct trading between the renminbi and the euro on the inter-bank foreign exchange market. It means that the euro, being the second most traded currency worldwide, is bypassing the Dollar to trade with the Chinese currency.
These are only some of the recent examples which prove the de-dollarization trend; there are many more signs and examples. Ironically, the Dollar is trending higher. The rationale behind this is that deflation is winning from inflation. Does it mean that a stronger dollar is here to stay? No. The trend of a financial asset is the result of a set of circumstances. If the set of circumstances change, the trend of an asset could change direction as well. In other words, the de-dollarization could have a totally different effect on he value of the greenback in 6 months or 3 years from now.
Going forward, it is reasonable to believe that the U.S. Fed will do “whatever it takes” to fight deflation. Expect continuously interventions from central planners, who are messing up the balance in our financial and economic system. Currencies, stock and metals prices will most likely continue to behave in a volatile way.
Because of that, we expect it to become much harder to anticipate on prices on the shorter term. That is why we think holding physical precious metals will prove its value over time. By holding an asset in physical form, it will protect against major moves of assets, like the consequences of the de-dollarization, deflation or inflation.