Gold and Silver prices spiked this week as gold traded above $1,185 and silver in the $16.85 range. The spike in gold and silver prices can be, in part, attributable to Janet Yellen’s comments at this week’s Fed meeting.
Chairperson Yellen indicated ultra-loose monetary policy for the foreseeable future with no rate rise in June. This pushes the .25% rate interest increase to September at the earliest. So, as we discussed last week, raising interest rates while headed into a recession looks like a non-starter. The decision by the Fed to delay any rate increase caused a massive sell off in the dollar and strength for all the precious metals. One look at the following chart shows how well gold has done against all the major currencies.
What we are witnessing today is a full blown currency war. Global central banks are lowering interest rates and monetizing debt. European Central Banks are pushing interest rates into negative territory trying to revive inflation. This means continued strength in gold against all major currencies in the long term.
Investors are buying bonds yielding less than zero. Global bond sales won’t mature for more than 30 years! Yet, global sales of these bonds have soared. Some of the currencies into which the bonds are denominated could be worthless by the time they mature. Bond investors are making riskier and riskier investments. European bonds are being issued at rates so low that they make U.S. debt instruments look good by comparison. However, the U.S. has a higher debt-to-GDP ratio than any nation on earth, with unfunded liabilities in excess of $100 trillion. Yes, the dollar looks strong now based on other unbacked currencies, but the dollar’s purchasing power has not recovered to 2003 levels. In fact, the purchasing power of the dollar declined 87% during the period of 1964-2014. It now takes $1 to buy what cost 13 cents in 1965. In 2003, an ounce of gold was $345 and an ounce of silver was $4.75 an ounce. Though the purchasing power of the dollar has weakened substantially since 2003, gold still purchases the same amount it purchased then, in spite of a downdraft over the past few years.
The dollar’s status as world reserve currency has allowed the U.S. to become financially overextended. Over the last several years, countries around the world, including Russia, China, and others, have insisted on a dollar alternative. The following article from the New York Times just this week shows how this effort continues unabated
BRUSSELS — Ignoring direct pleas from the Obama administration, Europe’s biggest economies have declared their desire to become founding members of a new Chinese-led Asian investment bank that the United States views as a rival to the World Bank and other institutions set up at the height of American power after World War II.
The announcement on Tuesday by Germany, France and Italy that they would follow Britain and join the Chinese-led venture delivered a stinging rebuke to Washington from some of its closest allies. It also called into question whether the World Bank and the International Monetary Fund, which grew out of a multination conference in Bretton Woods, N.H., in 1944 and established an economic pecking order that lasted 70 years, will find their influence diminished.
As American influence wanes and other countries move on without the dollar, it is inevitable that turmoil will hit the U.S. dollar. Although a rising Dollar Index makes it tough for metals to rise, the dollar cannot maintain its current rate of increase. Over time, like all fiat currencies, the dollar will depreciate. Trading dollars for precious metals will protect your wealth in the face of ongoing currency wars and crisis. Now is the time, as gold is selling at 5% below production cost and silver at least 10% under.