U.S. Dollar Reigns as World’s Reserve Currency May Be in Question

This summer has seen a dramatic rise in the price of gold. According to Nick Piquard, portfolio manager at Horizon EFT, the upwards movement in the price of gold may be an indication that the market is beginning to lose confidence in the United States dollar, which at the moment is the world’s reserve currency. The current gold rally, and the underlying causes, might be sending signals to investors that the financial system using the USD as the reserve currency might need changing.

Confidence in the USD is Deteriorating

A combination of unrestrained money printing and global debt continues to deteriorate confidence in the U.S. dollar as the world’s reserve currency. Piquard explained that the dollar continues to work so far, but he went on to say, “People are starting to realize they may have to make changes in how the USD acts as a reserve system.” What is adding fuel to the fire is that the country will no doubt have to print a lot more money in an effort to bail out of the current debt. This notion is fueling the increase in the price of gold.

The market has come to the realization that a further increase in the price of gold is inevitable, due in part to the unenviable situation the Federal Reserve and the government have been forced into.

Investors have realized that the current coronavirus pandemic is something that will be around for some time to come. The longer it takes to control the virus, the more debt the country will have to create. Congress is currently debating the extent of the problem to determine how many more trillions of dollars will be needed for a new stimulus package, after having spent trillions to date.

Piquard noted that even when the crisis is no longer, the economy will not strengthen overnight; it will remain weak for some time to come. It is not a simple matter of raising taxes to get the pandemic related expenses back. The market is factoring this consensus into its calculations, concluding that the situation is ideal for gold. Once the pandemic is under control, it will not be feasible for the Fed to quickly or simply “return to normal.”

Inflation vs. Deflation, the Argument

Piquard explained. There are two camps, inflationary and deflationary, each with their thinking. “In the scenario that favors inflation, gold will do well. In the opposite scenario, gold will perform poorly.”

Those in the deflationary camp believe the price of gold and stocks will drop, and the dollar will go considerably higher. Those who support the deflation argument says the world has borrowed U.S. dollars and they will have difficulty in repaying the debt, especially in the current weakened economy. When the time comes for debt repayment, there will be a scramble for dollars, driving down asset prices and driving up the dollar.

Gold bulls support the inflationary argument. This camp’s argument sees Federal intervention, not letting deflation take over the economy. The inflationary scenario sees continued intervention by the Fed, printing more money and weakening the dollar more. As gold cannot be printed, this position is favorable for the yellow metal.

According to Piquard, the gold market has yet to peak. He believes upside potential still lies ahead. A sign that gold has peaked is the price of silver. The price of silver has historically made a new high towards the end of a gold bull market. As silver is a metal used more in the industrial environment. When the price rallies, the implication is that the economy is picking up.