Gold has risen significantly in the past few months but this is only the start as the USA’s Federal Reserve is on shaky grounds. The fundamentals behind the recent move remain in place and, while the price may be edging lower, a period of consolidation, or price correction, is needed before the next rise.
What’s fascinating about the current bull run in gold is that it’s happening partly because various central banks are converting some of their US dollar reserves into gold. Central banks bought 224.4 tonnes of gold in Q2 2019, and more than 370 tonnes over the first half of the year. New mining output has found it difficult to keep up pace with the market’s requirement.
During the past decade of Quantitative Easing the value of the dollar has been protected by global money printing, which in turn has helped to ensure that currencies around the world have not risen dramatically in value relative to the dollar. The Federal Reserve needs to continue to protect the value of the dollar so that it is able to maintain its role as the reserve currency around the globe. If it was to lose its safe haven status, then the United States would be unable to print its own currency to pay its bills. Furthermore, if the US dollar was to lose significant value relative to other global currencies, investors could move away from the dollar, making it very difficult for the Federal Reserve to accommodate America’s vastly expanding US budget deficit and continue its policy of lowering interest rates.
Total US debt has now reached around $21.03 trillion, which is greater than all the combined debt around the world. Several central banks have converted their US dollar reserves (in the form of government bonds) into gold, suggesting that demand for US government debt will not keep up with supply, which is driven by the United States’ rising budget deficit. As a result, this will force the Federal Reserve to print more dollars in order to purchase the unsold amounts of new debt that the government issues. How can they? Isn’t the Federal Reserve planning to end the United States QE programme? Money printing will have to continue in some shape or form. Printing more currency will inevitably put further pressure on the value of the dollar. In order to protect the currency, the central bank needs to make it more attractive to investors by raising rates significantly. If the US economy moves towards or goes into recession, raising interest rates would be disastrous as unemployment rises.
Gold may have already risen rapidly this year, but this is only the beginning of its rise. US debt is rising, the value of paper-money is declining and interest rates are being forced towards zero. The only currency worth holding is gold.
United States Government, ‘U.S. National Debt Clock – https://www.usdebtclock.org’, (14th August 2019).