Three Ring Circus: Gold, Silver, and the U.S. Dollar

How low can the Federal Reserve allow the U.S. Dollar to decline? Every trader and investors understands the argument that a weak U.S. Dollar will usually boost exports and help to create inflation. However, the negative fact for the world is that the U.S. Dollar is the world's reserve currency. Therefore, when the U.S. Dollar declines goods for everyone in the world will inflate higher. Has anyone bought a vegetable lately? Produce has skyrocketed from last years prices. Look at the price of gasoline, the average price of gasoline in the United States is now $3.90 a gallon. All of these high prices for food and energy are occurring because of the weak U.S. Dollar Index.

All of the people that are on fixed incomes feel the effects of the weak U.S. Dollar the most. The U.S. Dollar is buying less and less goods for these individuals while there income remains the same. The inflation created from a weak U.S. Dollar is a direct tax for all consumers.

This morning the U.S. Dollar Index is trading higher by 0.47 cents to $75.36. This move higher in the U.S. Dollar Index is causing gold and silver to decline from their morning highs. Many traders and investors have bought gold and silver as an alternative to the U.S. Dollar. Eventually, the controlling powers of the United States will have to try and boost up the U.S. Dollar in order to keep gold and silver from breaking out further and scaring the public that the U.S. Dollar is nearly worthless. We shall see if we are now nearing that time as Standard and Poors has downgraded the outlook for the United States to negative this morning. Please understand that this is just an outlook cut by S&P as the credit rating of the United States is still triple A(AAA) rated.



Nicholas Santiago
InTheMoneyStocks

 

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Not really. The price increases in food and energy have been much greater than the dollar weakness. What you are seeing is an increase in demand for food and energy, especially in Asia, compared to relatively fixed supplies. So it is more of an increase in demand and not classic inflation.

 

Not classic inflation, but my view is that the Asians are wanting product back in exchange for dollars, not just more notes. In agriculture, my industry, anything not nailed down that is exportable is being exported. This is creating some extreme price anomolies versus product not easily exportable. Basically, if its exportable is high, if not its low priced. The US has to pay for the trade imbalance of the past few decades, and they are taking payment in food and other hard goods instead of lowering value Treasuries. They are also buying our cropland, as a Realtor I know in Iowa is getting a phone call a week minimum from Asian buyers.

 

I highly doubt that there is that much more demand when most of the world is in a recession. I think the price increase is more likely to speculators with free money (QE) driving the prices up.

 

I'm hearing a lot lately on the news about speculation of future higher oil prices driving the price up now from additional buyers anticipating profits. There's plenty such speculation in silver too. One might attribute food prices to shortages due to weather. Of course when oil goes up, everything goes up. I think Asian demand is a big factor, and only getting bigger. While reasons come and go, the trend is pretty consistent. Silver has a fresh high at over $44/oz!

 

That's an interesting anecdote and in line with what I have been reading. Inflation of the dollar can be approximately measured by it's relative value (dollar index) but it's impact on supply and demand in our global economy creates a secondary impact on commodity prices. In the case of the US, the dollar has dropped roughly 5% in the first 4 months of this year. Since many major economies are holding US debt and virtually all economies are holding a reserve of dollars to back their trade, the 5% loss is painful and impacts everyone. To protect their value, other countries would rather hold a commodity like cotton, land, copper, silver etc. and begin trading dollars for cotton (just picked one). But since there are far more units of dollars than there are units of cotton, cotton gets bid up much higher than the dollar falls.

It was good to see the dollar inch it's way back up above 75 in the past few days. Perhaps it was in anticipation of more serious talks about controling deficit spending and addressing our debt issues in the face of the potential S&P downgrade.

Bluesboy65

 

Speculation is definitely a factor. But the increase in demand out of Asia is readily available in the economic statistics.