Courtesy of www.adenforecast.com
The situation with the U.S. dollar is getting downright spooky. Even though the dollar moved higher this month, it remains bearish, the major trend is down and worldwide sentiment continues to worsen.
To illustrate what we mean, here’s a key question… What does the Prime Minister of Japan have in common with central banks in countries like China, India, Russia as well as billionaires like Warren Buffet and Bill Gates, former Fed chairman Paul Volker, several Fed presidents and the former assistant Treasury Secretary in the Reagan Administration?… Answer: This growing list of countries and individuals are all seriously concerned about the U.S. dollar’s future, in some cases extremely so.
CENTRAL BANKS: Lowering dollar reserves
A recent BIS study, for example, concluded that Asian central and commercial banks have reduced their dollar holdings over the past three years from 81% to 67%. More worrisome, our biggest lender, Japan, has been a net dollar seller in four out of the past six months.
These and other countries simply do not want to keep funding U.S. spending. The U.S. is heavily in debt and living beyond its means. Growing numbers believe the dollar will be unable to maintain its world reserve currency status, and they want out.
The fact is, no country has ever been able to keep its world reserve status while building up the biggest debts in history. Plus, we’ve transferred our wealth to foreigners, who’ve accumulated $3.6 trillion in U.S. assets over the past 15 years, thanks to the growing U.S. trade deficits (see Chart 1). Some Fed officials feel this is nothing to worry about, but history tells us otherwise.
DEFICITS AND THE DOLLAR
Reserve status is a privilege belonging to the most economically stable country and the currency reflects that country’s health and safety. The latest full year U.S. trade deficit soared to a new high of $665.9 billion, or 6.3% of GDP. Anything over 5% is considered extremely dangerous and it puts downward pressure on the currency.
As you can see, the U.S. dollar index has been in a steep decline for over three years but it’s recently been holding at its 1995 low (see Chart 2). As long as the dollar index stays below 86.50, the major trend will remain down, meaning the dollar’s headed even lower.
Remember, the dollar has already dropped 70% against other currencies since the early 1970s when it stopped having a link to gold, becoming instead a floating paper currency. The current dollar decline is actually a continuation of this long-term downtrend.
Due to the current environment, we feel strongly the dollar is headed even lower and since gold and the dollar move in opposite directions, this is going to keep upward pressure on gold.
Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, gold shares and the other major markets. For more information, go to www.adenforecast.com