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Category: Bullion Bulletin

Bullion Bulletin: Dollar Strength

The US Dollar is marching high, now it has reached parity with the European Union's Euro. It's gained 15% against the Pound Sterling, 16% against the...

24 July 2022

Gary Mead

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The US Dollar is marching high, now it has reached parity with the European Union’s Euro. It’s gained 15% against the Pound Sterling, 16% against the Euro and 23% against Japan’s Yen in the past 12 months. This strength creates a number of problems, not least it will contribute to inflation, as most commodities are traded in US Dollars – so when the Dollar strengthens, these items cost more in local currencies. Furthermore, many countries owe their debts in US Dollars – they owe much more today than this time last year. The risk of there being more Sri Lanka’s has become greater; sovereign debt crises are made of this scenario. A stronger Dollar means that other countries will buy fewer US goods, and the US trade deficit (the difference between what it sells and what it buys), which is already almost $1 trillion/year, will get bigger.

US Dollar index against a basket of currencies

Why is the Dollar doing relatively well? Partly because the US is putting up interest rates to try to tame inflation, partly because the country is halting the creation of money, partly because of expectations from financial markets – the world is becoming alarmed about the prospects of a global recession at a time when prices are still on the up; stagflation, very low or no economic growth combined with inflation, is the great fear. The energy squeeze which has already pushed prices to record levels will get worse, according to the head of the International Energy Agency. “This winter in Europe will be very, very difficult” he said.

Stagflation is, fortunately, a rare phenomenon. In previous stagflationary episodes, gold has held up well: between the third quarter of 1973 and the first quarter of 1975, US gross domestic product (GDP) declined in real (i.e. inflation-adjusted) terms and at the same time inflation rose from 7.4% to 10.3%. In the same period, gold prices went up by 73%. The late 1970s saw an economic slowdown combined with accelerating inflation, and the gold price more than doubled in 1979. Of course past performance is no guide to the future; yet as equities (as measured by the S&P 500 index) recorded their worst first half of the year since 1970, and pent-up price rises for basic consumables seem around the corner, the likelihood of a recession and/or stagflation is increasing. Speculative assets have lost as much as 70% of their value so far this year, but gold has remained relatively stable.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

*Bullion Bulletin is an economic opinion piece from Glint that is emailed every Wednesday to our Newsletter readers. Make sure you check your email every week to stay abreast of world events that are likely to have an effect on gold. The story is repeated as part of the Friday edition of the Glint Newsletter, The Treasury, and can also be found in the blog section of the Glint website at www.glintpay.com.

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