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This post was written by Minyanville contributor Lance Lewis
The consensus seems to be blowing off the G20 as a nonevent for the dollar, but then again the consensus didn't anticipate the Fed announcing that it would begin to monetize Treasury debt a couple weeks ago either. And it was that Fed decision that brought us to where we are today.
I don't think US creditors, like China, are very happy about the Fed monetizing government debt (especially after the Premier seemed to specifically warn against such reckless action a week before the FOMC). With all the press that has been devoted to dethroning the dollar over the past several weeks in the wake of the Fed announcing its Quantitative Easing program, my suspicion is that China and the other BRIC nations are going to push for some sort of G20 commitment at this week's Summit to explore moving towards some sort of new reserve currency scheme.
In fact, given the statements coming out of China over the past week and in the Chinese press, to not push for such a commitment at this week's G20 would be a serious "loss of face" by the government in the eyes of its own people. Likewise, as a creditor of the US, China most definitely has the leverage to push for such change even if the US resists the idea, which it most surely would.
Now, obviously we wouldn't see an overnight switch to some sort of new reserve system on Thursday, but a mere commitment from the G20 to explore such a move (or perhaps even simply heated discussions that end in disagreement, which would probably be even more bullish for gold specifically) would raise enough uncertainty about the dollar's future to weaken it against its major rivals, especially against gold.
We'll obviously know by Thursday if my expectation about this G20 is correct or not, but if it is, then I would expect the euro to begin to resume the rally that began back in early March sometime over the next couple days and for gold to begin trying to rally sometime over the next couple days also well ahead of any potential news that is leaked from the G20 Summit.
Should the ECB additionally announce its own QE program on Thursday when it meets, that would be even more bullish for the yellow metal in all these fiat currencies, but I'm not counting on the ECB to do that just yet.
One thing is hard to deny, and that's the fact that the gold shares continue to trade exceptionally well in the face of the both the big bounce in the dollar off its March low and the slide in gold back to levels that preceded the Fed's QE announcement (not to mention the decline in the equity market yesterday).
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Reader Comments (Page 1 of 1)
3-31-2009 @ 4:11PM
Iridium said...
The point of China trying to create a move to some sort of other reserve currency is to create a stable value for long term assets.
The problem is that some sort of standard would have to back up this currency. You can't have a stable currency unless you have a stable asset to back it up.
If that stable asset turns out to be gold then it would not be very bullish for the commodity at all. The new reserve system would confiscate all gold assets and set a value.
Going off the gold standard was the worst idea of the last century and started us down the slippery slope of financial oblivion. It also enabled currency speculators to create massive fortunes and influence the market. Essentially destroying countries in the process.
Gold as a real asset is worthless because you can not purchase anything with gold. Gold as a manipulative investment is worth a lot. If you can control price movements in gold you can control massive profits by playing various currencies against the commodity. Read: George Soros.
Gold above $1000 an ounce is truly counterproductive. For gold to rise above that level a currency like the dollar must be devalued to the point that inflation will wipe out any gains. In the short term is can generate a lot of wealth for a manipulative player but in the long term it guarantees other assets will be worth a lot less. That is why for all of the bullish sentiment on gold the price has yet to skyrocket again. As long as we are stuck with currency with no standard as a form of trade for goods and services, gold is essentially worthless.