What effect does a devalued dollar have on precious metals?

I received an email today from FORBES.com and they had an interesting article regarding the U.S. Dollar. It said the Federal Reserve Open Market Committee had just met and their plan is to devalue the dollar by 33% over the next 20 years. Provident Metals News is also carrying the same article. If this is the truth, what effect will this likely have on precious metals? One would think as long as I have been doing this, I should know. But I'm unsure. My Duh. Does anyone have any thoughts that may help me understand this a little better? Thanks ahead of time everybody for your help and insights.

 

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That story is nothing new.
The dollar has been continuously devalued since the beginning.
In 1933, a loaf of bread was 10 cents. It's more than $2 now. In 20 years it'll be $5.
In 1933, gold was $35. It's around $1700 now. In 20 years, $35 or $1700 or $10000, no one can predict this.

 

Like my coin guy and I were talking about awhile ago, in 1920 a Morgan dollar bought you 7-8 gallons of gasoline and it still does today. The paper money does not do the same thing and therefore it has been continually devalued over the years. So if a gallon of gas would reach $6, then by historical value a Morgan dollar should be worth $42-48.

 

but what if the economy get better? will this drop gold/silver prices?

 

One can just look at the dollar within the US as is in post 2 and 3, or compare the dollar with the world basket of currency, or since the dollar is the reserve currency for commodities, the USD relation to commodities. Since gold and silver is affected by the USD, as it gets stronger against the World basket of currencies, the price of gold and silver would drop if all other factors stayed the same, and conversely, a weaker USD against the world basket will cause the price to increase. IMO, gold and silver ( and other commodities) are being mainly affected currently by the USD/EUR ratio, such that if the Euro goes up, gold will also. If the euro goes down, so will PM ( unless one of the other factoras such as precious metals are seen as a risk off item, but that didn't seem to happen the last few "Scary world things". IMO.

 

All money is just an illusion...

 

do you guys think silver will drop back down to 6-20 dollar if the economy get better? or stay the same since silver is under valued and is less available then gold right now?

I'm trying to invest in silver but now that I'm so into silver I'm thinking about collecting. just don't wanna spend more money on nice coins that i wanna keep and one day have it be worth like 6-10 an ounce...

 

But that analysis is misreading and wrong. If someone had a dollar in 1920 they would have put it into an interest bearing deposit. With the compounding of interest you would have close to the $42 today. To ignore interest and just plan on keep a dollar as a physical dollar is therefor misleading comparison. Like it or not, a dollar in 1920, 1950, 1980, or today are completely different things. Most of the "return" you gain from holding PM is not gain at all, its simply keeping pace with inflation.

 

And just a thought on my side, if the dollar quickly devalues in say, the next five years, your income/wealth is good, it might be a good time to invest to hedge. So hard to balance speculative portfolio investments.

 

Gold has one function, and one function alone, which is a hedge against inflation. Jewelry may provide some demand, but that's not a function. This function is why central banks have been buying it the last couple years even as it continues to break record highs, because they know (though they won't admit it) that as they continue to devalue currency that gold will be the beneficiary. I do not know where the 33% devaluation number comes from, but the FOMC did pledge to zero % interest rates through 2014 which means that as inflation continues to rise that negative real interest rates (interest rate minus inflation) will get more negative. The more negative that real interest rates are the more that inflation will occur. It is a vicious circle, because as banks can borrow money from the Fed at zero % interest they can loan it out for whatever they choose (~4% for example with home mortgages these days) and make a profit simply by making loans with money they don't even need to have, because it's conjured into existence for the purpose of the loan. In a closed system the gold price should increase by the same percentage as the money supply increases by, and the money supply increases due to these sorts of loans. This could all be reversed by intentional deflation, as in removal of dollars from circulation so nothing is guaranteed. However such a money supply deflation cannot occur unless the economy is healthy enough to handle the lack of liquidity. Price deflation is a different story and could happen even in an inflationary environment, but gold can potentially be immune to this if it is once again used for currency backing since the price of the currency would be driven by the amount of gold available to back it instead of the other way around.

 

At 10:15 PM west coast, the euro is up 0.33% to the USD, and gold is up 0.46%. Many must feel that Greece will capitulate on austerity today /tomorrow our time. Of course there are still many volatile political situations which may crash the party.

 

Oh come on in 1920 there were around 7.5 million vehicles in the US now estimates puts that number over 250 million. 250/7.5 equals a factor of 33 1/3. How many gallons oil gasoline can you purchase with $33.33? 7 to 8 or even more gallons maybe? This is just cars and trucks and doesn't factor in tractors, construction equipment, airplanes, boats and etc. In the 1920s the US was the leader in oil production and a real net exporter. 1920s oil was extracted from shallow wells virtually free from governmental regulations and brought on line at very low cost and capital investment. This type of analysis leads to a road of false assumptions IMHO.

 

What I don't understand, is why do people accept this?

The dollar or any currency's rise and fall should be directly related to the economic output of the country and 100% dependent upon the real wealth generated within the country. In the United States, free market system of deciding currency value has been replaced by a handful of unelected, unaccountable, people who decide the dollars value without regard to the economy or the effect of their decisions on people.

By reducing the value of the $ by another 33% it's the same as stealing the savings of the elderly and forcing everyone else to take big risks with their money just to stay ahead. The only alternative that people have, is to move their savings to gold & possibly silver, because these people can't directly control the worth of that. This has proven out by fact that once Allen Greenspan decided upon a policy of $ devaluation, gold has gone from $250 to close to $1800. IMO, the $ won't last another 33 years.

To answer the OP, it's very very good for he future of gold & silver.

 

This would, of course, tend to put a tailwind behind precious metals. But since the price of gold and silver are discounting far worse conditions than a 33% devaluation, the price of PMs might go up somewhat less if the target is achieved. Also, a 33% return over 20 years is nothing to get excited about.

 

Devaluation means the price goes up but your purchase power for the same number of dollars declines. More US$ chasing the same goods increases prices, which is called inflation.

There is an Australian forum that I sometimes participate in and they mention that the price of silver has not really gone up that much in AUD, only in US$. That is the Big Advantage to buying Bullion.

Your purchasing power in paper currency goes down for the same number of dollars, but remains the same or appreciates slightly for PM

 

I can get bread for under a dollar where I live and that's normal price.

 

It's also likely very horrible for you as well. When it comes to food, I opt to buy quality over cheap price and quantity. We need food to survive, it should be the most important thing for your own well being I say.

Also, my wife can make 3-5 loaves of homemade bread that is better and better for me with the ingredients used for about 4-5 bucks total in cost. That's the way to go I say.

 

Yeah that kind of bread is an example of modern living through chemicals. It's like a twinkie without any sugar or cream filling.

Bread like they used to bake it in 1933 will cost you $3.99/loaf and even that comes from frozen dough.

 

Ah yes, the luxuries of life during the Great Depression. "Artisan" breads are sold at places like Whole Foods at that price not because of the cost of ingredients but because people will pay that much. It's not nearly the same thing.

 

^Artisan isn't made from frozen dough. None the less, I thought I'd look into it further. Wonder Bread was the first national brand of sliced white bread starting in 1930. It cost 9 cents in 1930. (I could not find a 1933 price). I compared that to what's now known as Wonder Bread Classic White. I have no idea if the specifications are the same though they didn't use high fructose corn syrup in the 1930s, since it wasn't prefected in the laboratory for mass consumption until the 1970s

I also discovered it's difficult to get on-line pricing for groceries on a national basis. I found this loaf of bread ranging from $1.79 at a remote Walmart, to $2.79 in a store near here to $3.99 at Mr. Grocer. This is an average of $2.86/loaf. So given that we have a loaf today made with inferior ingredients and benefiting from modern production technology we get a monetary inflation from $0.09 cents to $2.86.

This is a price increase of 3077%. This price increase was brought to by the wonders of central banking. Where your money goes into their pockets.