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LAWRIE WILLIAMS: Gold on a tear as dollar weakens - silver being left behind

Since Donald Trump assumed the Presidency of the world’s richest and most powerful nation, the US dollar index (relating the dollar to a basket of other currencies) has fallen by around 11% accounting for much of the increase in the gold price in US dollar terms.  By contrast, the gold price in Euros has actually fallen by 1% over the past year, so what may appear to have been an appreciation in the gold price has been more a reflection of the depreciation in the value of the supposedly mighty US dollar.  It’s only that most people around the world look primarily at movements in the gold price in the US dollar – as we do in the title of this article- that the gold price is seen as having advanced.

But gold in US dollar terms does provide a useful benchmark as over time the dollar is probably the world’s most stable currency and is, for most nations, their primary reserve currency in their foreign exchange holdings.

This relationship between gold and the US dollar, with the former providing perhaps the most overt indication of how the greenback is doing vis-à-vis other currencies is the reasoning behind what seems to be an ever-increasing view that the power- that-be collude to suppress the gold price to hide what is an overall indicator in the decline of the dollar’s purchasing power. 

Some put this decline at upwards of 80% since President Nixon severed the convertibility of the dollar for gold to protect US gold reserves. In some sectors of the economy this decline is readily apparent.  Grocery shopping, property prices etc.  In others less so, notably transportation and electronics, but in general $100 today would only buy you a fraction of what you could have purchased with $100 in 1971.

But it’s not only the purchasing power of the dollar which has been in decline.  The same is true of virtually any nation’s currency.  All currencies nowadays are fiat in that they have no backing, which is why some economists call for a return to a gold standard.  This is probably impractical without a massive gold price increase and, even then, would probably be overrun very quickly by ever increasing consumer demand for goods and services.  

There is also talk of China trying to introduce some kind of gold backing for the renminbi (yuan) at some time in the future thereby leapfrogging the dollar as the world’s go-to currency, but this is probably more a theory than a likely eventuality.  It is seen as the reason China is assumed by many to be building its gold reserves at a far higher rate than it has been reporting, but this may also, if true, be just as support for a future petro-yuan – with the yuan exchangeable for gold – as a Chinese bid to replace the petrodollar!

So gold investors should treat the latest rise in the gold price purely as a wealth protection exercise.  That is what gold is good at over time.  If the dollar declines further then gold will rise further, as will all the major precious metals – and most other commodities too.  Changes in prices over  the 47 years since President Nixon stopped dollar convertibility are self evident, but in geographic areas like Europe where currency purchasing power has diminished similarly the imposition of a new currency, and/or the implementation of other changes like decimalisation in the UK, have made direct comparisons that much harder to relate to.

But regardless, gold has moved up sharply in dollar terms in the past few days despite mixed economic data out of the USA.  Much of this increase so far seems to have passed silver by and the gold:silver ratio has actually risen a little standing at close to 78 at the time of writing, although silver has been making a bit of a late run ahead of the weekend as have platinum and palladium.

We still stand by our forecast that the gold:silver ratio will come down to 70 or lower during the course of the year which would make silver potentially a better investment than gold if it does follow its historic pattern and rise faster than gold when the latter is on the increase.  At the moment we see no reason to change our forecast for gold to hit $1,425 or thereabouts this year and silver $20.50.  As I stated in the article in which I made these predictions- Precious metals price predictions for 2018 – gold, silver, pgms – I look at these forecasts as being conservative and if the dollar continues to fall and precious metals prices to rise sharply. as they have this past week, then I may see the need to adjust the forecasts – at least in US dollar terms.  However, also bear in mind that gold and silver had a strong start in 2017, but then tended to pull back.  2018 could see a repeat of this pattern, although I don’t see palladium making the kind of gains it did last year.

13 Jan 2018

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London – recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com

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