Gold Was The Best Performing Currency In 2014 Behind The US Dollar…

And today we are witnessing the perfect set-up for a huge rally in gold and silver.

The dollar index, which weights the US currency against a basket of major trading counterparts, hit its highest level in nine years in the last week of 2014, rising of 13% over the year whilst gold fell by only 1.5% over the same period from $1,202 to $1,184. Not a bad result by all means considering that gold is inversely correlated (or expressed in) to the US dollar. It basically showed the underlying strength in gold vis a vis all currencies.

Gold in euro and pound rose 13% and 6% respectively. Gold in yen rose 15% in 2014 whilst the Chinese yuan ended 2014 with a loss of 2.4% against the dollar and 1% against gold. Many currencies were severely devalued in 2014 as the competitive currency devaluations continued unabated. I think what is important to understand is that gold is becoming the kind of benchmark against which purchasing power is being measured “n’importe quai” the currency or the factors driving it. Geopolitical factors also made gold shine in local currencies such as the Syrian pound, Ukrainian hryvnia and of course the Russian rouble. Anyway these examples clearly illustrate that gold is an important hedge against geopolitical risk and currency devaluations.

The dollar strength was also boosted by the weakness of the currencies of oil-exporting countries such as Russia Nigeria, Iran and Venezuela following the fall of the oil prices. The oil price has fallen by more than 57% since June, when it was $115 a barrel. It is now $48. Norway’s krone fell 19% against the US dollar. Russia’s rouble fell 46% as lower oil prices and sanctions imposed on the country amid the Ukraine crisis took their toll. Argentina’s peso fell 23%, while Colombia’s peso lost 19%.  Though most of these countries have hundreds of billions of US dollar denominated loans outstanding and are now also looking at much higher interest and repayment costs. A double whammy, that will further negatively affect worldwide economic growth rates. And this is of course besides the havoc that is being created in the high yield market of $1.5trn with energy accounting for between 18%-20%. All kinds of conventions are being broken and the oil companies don’t have any choice but to produce in order to generate the cash flow to meet their obligations. Lower oil prices become a self-fulfilling prophecy.

The often-heard opinion that the lower oil prices will act as a tax cut for the middle and lower classes doesn’t hold ground in my point of view.  To put this into context some 72% of American workers made less than $50,000 2013 of which 50% made less than $28,031 and 39% made less than $20,000. And these figures are most likely to be worse for 2014. Do you really think that when people can hardly make ends meet and when there hardly is any confidence in the prospects for the economy  and jobs and trust in the politicians that people will spend what they “save” on their gasoline bill?

A lot of investors are redirecting their funds into US dollar denominated assets, and gold, trying to avoid the loss of purchasing power measured in their own currencies following QE, deflation and the lower oil and gas prices. The concept of investing more of their funds in gold and silver hasn’t fully been accepted yet because most investors still believe the US economy is still doing ok, which it isn’t.  The historic low interest rates in the US and in the rest of the world are telling us a different story than the unbridled optimism expressed by CNBC’s unrealistic reporters. Gains on bond portfolios in 2014 of 25% or more are no exception and informing us that there is something sincerely wrong with Main Street.  What the monetary authorities don’t seem to get is that their continuous QE is no panacea for deflation if anything it creates more deflation. To me it is clear that the multiplier effect for QE has gone negative. Asset prices are being blown up and the middle class can less afford their primary livings needs. Oil might on the surface look like the exception though what help is that if you lose your job because companies go out of business. The shale oil boom is estimated to have created some 1.3 million jobs many of which will be lost as drilling slows. Anyway it is clear to me that we are facing a downward spiral in terms of economic growth and confidence and that all these QE measures have demonstrated their negligible efficacy, if anything it has created a dangerous almost pre-revolutionary situation between the 1% and 99%. 


In any case my assessment is that we are in the last stages of the reign of the US dollar as the reserve currency. We are witnessing the flight into the dollar because of the weakness of all major currencies, the Yen, the Euro and the Ruble and the Yuan because of deflation, QE or lower oil and commodity prices. And when the “mighty” Dollar falls we will see a spurt into gold and silver because you have to ask yourselves which currency you prefer to preserve your wealth in when all other currencies falter/fail.

The question is when will the US Dollar fail! As history has shown no currency can without punitive consequences keep on diluting its currency though the US authorities still believe that is possible. 

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Gijsbert Groenewegen ©

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www.groenewegenreport.com