Yesterday, stocks went nowhere. Oil went nowhere. And the dollar went down as gold went up.
The reason for the dollar's decline and gold's rise was given in the front-page headline of today's Financial Times. China launched a "new dig" at the dollar, it says. As near as we could tell, China merely stated the obvious - that the world is going to have to find a better monetary system. The US dollar won't be king of the hill forever. And China, which is up to its neck in dollars, would like to find a solution sooner rather than later - that is, before the dollar goes the way of all paper.
The dollar will eventually give way to inflation and devaluation, but probably not soon.
"I'm absolutely worried about inflation," says John B. Taylor.
But here at The Daily Reckoning, it is not inflation that worries us...it's the lack of it. Making a long story short, as long as the feds see no inflation they will continue trying to create it. In the end, they will get more than they wanted.
And where will investors flock when that day comes? You guessed it - to our favorite yellow metal.
Though, right now, instead of inflation, we have deflation. Today's New York Times tells us that deflation in Ireland has reached 5.4% - the highest since the Great Depression of the '30s.
You know the reasons for deflation as well as we do. The world suddenly has too many people who borrowed too much money buy too many things they really didn't need and really couldn't afford. This caused the world's producers to greatly over-estimate the 'real' demand. Their customers began to disappear in 2007. Their factories are still standing.
Bill Bonner
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- US Dollar Declining as China’s Currency Rises
- As Supply of US Debt Goes Up, Quality of Dollars Declines
- China Rises While United States Declines
- The Rally is On as the Dow Rises
- Ireland Going Through Same De-leveraging Process as the US
About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Nik on 14 July 2009:
What i'd like to understand is, if gold increases, the USD decreases. What does that mean for the USD against gold?
i.e if you buy Gold now, say $1180 AUD, but the USD drops (meaning the AUD increases) and gold is on the rise. what happens if AUD exhange rate reaches AUD$1 for US$1 and gold is now at US$1000/oz. do we have a net loss of $180?
More importantly, what happens to your gold (which was bought in australian dollars) when the US Dollar completely devalues?
Comment by Coffee Addict on 14 July 2009:
Nic:
The desirablity of investments in gold, or gold miners (or anything else) differs markedly depending on your investment currency, time frame, other portfolio investments and accommodation status. Short to medium term investors also need to consider their capacity to anticipate and manage the timing of market roller coaster rides.
In a nutshell, if the USD were to tank out in say 12 months time, the price of gold may shoot up (drug analogy accepted) in USD only. The immediate impact on other markets may be extreme volatility .
A bottomed USD would adversely impact dollar holders and exporters to the US (eg. India, China, Japan, Taiwan, Thailand, Russia, South Korean etc). Retail demand for gold in these countries may well fall. What Central Banks do with do with their future gold holding cannot be guessed. In these circumstances nobody has a crystal ball that is good enough to value gold investments in future AUDs.
I just stick to a few juniors and mid tiers in the expectation of solid very long term dividends .
Comment by Glen on 19 July 2009:
Deflation- good grief every time a new open home listing for the sale of a home here in Melbourne goes on the board at the front of the property it is soon followed by a SOLD sign across the offer, and to add wizardry to the equasion the reserve has also been beaten by thousands of dollars, thats called inflationary factors, again no stabalising here. Great for some but frightening all the same. Last time this all happend included Hawke/Keating HecKononics around the 1989-1991 eara, dose anybody remember, when that bubble burst the Factory rents went down from $1000 a month to $400 a month. That was a real LEVELLING experience. That descibes the carnage in real times.