Understanding currency manipulation, the ‘strong’ dollar, and gold prices


Markets are hard to understand when the major players are as corrupt as they are today. But it is the world we live in, unfortunately. So we have to do our best to be responsible and account for the corruption when we make investment decisions.

Currently, there is a lot of talk about the strength of the U.S. dollar and the low price of gold. But what do these two things have to do with one another? On the face of it, the answer is fairly simple.

Gold as a dollar-denominated commodity

Gold is a dollar-denominated commodity. That means that gold is priced in dollars rather than, say, rubles, euros, or yuan. As a result, when the dollar grows stronger, the price of gold goes up for people who hold currencies that are not keeping pace with the dollar. An example will help, here.

Suppose you live in Brazil today and you deal in Brazilian reals (‘R’). The exchange rate is US$1 to R$2.69. So, US$100 equals R$269. Accordingly, at the current price of gold (US$1,195.53/oz), you would need to pay at least R$3108.38 to obtain an ounce of the metal.

But what if the price of gold remains the same, but the dollar gains on the Brazilian real? Remember, gold is a dollar-denominated commodity. That effectively means it is priced in dollars everywhere. Under these circumstances, the price of gold remains the same for people holding the dollar, but for you (in Brazil) and people in other countries with currencies that are losing ground, the price of gold effectively increases.

So, pretend that the exchange rate is now US$1 to R$3. What is the new price of gold for you Brazilians? R3,586.59. In other words, you have to pay R$478.21 more per ounce.

That’s a big chunk of change.

This means that a strengthening dollar will, all other things remaining equal, essentially raise gold prices throughout the world. And when prices go up like this, demand goes down in those countries.

The effect? Less demand without any noteworthy change in supply leads to lower prices.

So, a stronger dollar generally means lower gold prices than you would otherwise expect. And if the dollar is legitimately strong, it will likely remain strong for a while. So, investors may be hesitant to buy gold at that point.

Currency Manipulation

Unfortunately, the simple fact that a currency appears strong today doesn’t mean that it is actually strong. And the opposite can be true, too. A decent currency can lose value for reasons that don’t make sense in purely economic terms, as when economic warfare explains prices more than other variables. The Russian ruble over the past couple weeks is probably a good example of a currency that has been weakened by things like sanctions and economic warfare, rather than what the free market would actually dictate.

That said, we also know that currency manipulation is something that is constantly happening.

What is currency manipulation and how is it accomplished?

Currency manipulation is a way for a government to artificially move the exchange rate of its currency away from the rate that it would naturally settle at in a free market.

China has had a history of currency manipulation. China has consistently wanted to export more goods than it imported. If the Chinese yuan is weak relative to the dollar, there is incentive for American companies to import Chinese products. After all, when the dollar is stronger than the yuan, people who hold dollars effectively get discounts on these products sold in yuan. As a result, the Chinese government has historically wanted to keep the yuan artificially weak compared to the dollar.

How could it do this?

By printing a lot of yuan and buying lots and lots of dollars and American debt. This artificially increases demand for the dollar and puts inflationary pressure on the yuan. So the yuan stays artificially weak relative to the dollar through a kind of trick — “currency manipulation.” (Incidentally, this is also why China holds so much American debt. Japan, too — another country with a long history of currency manipulation.)

The point, here, is that currencies can be, and frequently are, manipulated. And while people most frequently think of currency manipulation as something done by countries trying to keep their currency weak in order to keep exports up, it can also go the other way. A country can also work to artificially strengthen its currency.

The U.S. today

The American dollar is currently strong and apparently strengthening. The most frequently cited reasons for this are these:

1. The Fed stopped printing money — i.e., Quantitative Easing (QE) is over. So the supply is steady, and there isn’t new inflationary pressure from printing.

2. U.S. exports are up.

But there’s a problem with this. The Fed had been printing huge sums of money for years while China and other countries were moving away from the dollar. In other words, international demand for the dollar was decreasing while the supply was going through the roof. So what is the real reason for the strengthening dollar?

Well, a very strong case can be made that there is currency manipulation at work. There has been a mysterious buyer of U.S. debt over the past year. And whoever this is, they’re loaded. Because they’ve almost single-handedly been able to make the end of QE possible. Whoever the buyer is, it seems Brandon Smith (here) is likely right that the IMF is involved in making these purchases, along with some others of that ilk. And the end result is an overvalued dollar that allows the powers that be to cover up an economic crisis of the highest order in the West.

What does this mean for you and your gold?

It means that gold prices are artificially low right now, and they’ll only remain that way as long as the people responsible for the currency manipulation can continue they’re cover-up of the economic crisis. It is impossible to know exactly how long we have until the collapse happens, but the fact that the U.S. has taken such an aggressive posture towards Russia, Syria, and North Korea suggests that we may just be an event or two away from a dramatic reversal in the comparative values of the dollar and gold.

It is my firm opinion that buying gold today is the right thing to do for most investors. There’s coming a time when the dollars you hold will be as worthless as the paper they’re made with — and that may not be far off. When that time comes, you’d rather have gold (and silver) than dollars.

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