Is The US Dollar Living On Borrowed Time?

Time Is Running Out for the US Dollar

NEW YORK, March 24 /PRNewswire/ -- Jeffrey Nichols, Senior Economic Advisor to Rosland Capital, had the following commentary based on today's market activity and the week ahead.
More Irrational Thinking
Gold's latest breakdown below $1,100 an ounce seems like a big deal -- worrying gold bulls, vindicating gold bears, and giving market analysts and financial journalists something to write about. But, in reality, gold has been fairly stable in recent weeks, trading in a range between $1,090 and $1,040.
Few get excited when a $10 stock moves up or down 50 cents, but every wiggle in the yellow metal's price seems to garner outsized attention. Similarly, smaller moves up or down in the price of gold are really no more than noise, as gold traders and speculators react to the latest news or technical triggers, but mean little for gold's long-term prospects. In fact, volatility can provide investors real opportunities to purchase for the long term.
In recent months, the gold market has very much been hostage to developments relating to Europe's sovereign debt crisis as reflected in the euro/dollar exchange rate. Uncertainty about the future of the euro, Europe's common currency, has increased demand for the US dollar . . . and a stronger dollar has weighed heavily on gold.
This chain reaction -- from euro fear, to dollar appreciation, to weaker gold -- has been the chief culprit behind this week's swift drop in the price of gold . . . but, so far, gold seems to be holding up well despite the strengthening dollar.
We believe the metal's long-term trend remains the investor's friend. The next really big move -- say in excess of 10 percent (or more than $100) from current price levels -- is much more likely to be on the upside.
The move below $1,100 has not yet generated another round of technically inspired speculative selling. Instead, the metal bounced off its lows near $1,090 and has been trading around the $1,100 level, plus or minus a few dollars. If it holds around this psychologically important round number for a few days, a return of traders and speculators to the long side of the market could quickly kick the metal higher.
Sources of Weakness
Just a week ago, with gold trading between $1,120 and $1,130, it looked like the yellow metal might soon be moving higher, resuming its long-term uptrend and inevitable march to new highs later this year. Selling pressure on the euro was easing on hopes that the European Union would provide loan guarantees on newly issued Greek debt in order to stave off the country's default on its sovereign debt.
But then, over this past weekend, German Chancellor Angela Merkel cast doubts that the European Union would provide such aid. This led to Monday morning's euro weakness -- pushing gold lower as the dollar appreciated.
India's central bank, the Reserve Bank of India, this past Friday unexpectedly increased its key policy interest rates to restrain excessive economic growth and temper domestic inflation. Historically, India is the world's largest gold-consuming market -- and some believe any tightening of monetary policy will temper the country's gold demand.
Irrational Markets
What is important to remember is that gold will often react to short-term items like actions in Europe and India. To the extent that these two developments -- euro skepticism and monetary tightening by India's central bank -- were indeed responsible for this week's gold-price decline, we think the market has again got it wrong in the short term. But no matter how wrong the market is in the short run, in the long run, it is always right.
First, the US dollar is appreciating not because the American economy is the picture of health or because US monetary and fiscal policies are instilling confidence in the long-term value of our currency. Indeed, the race between the greenback and the euro is a race to the bottom, not to the top. And, regardless of which one win's the race to the bottom, gold will be moving up in both currencies.
Rather, it is the euro that is depreciating against the dollar because the European economic situation is even worse than ours and because the euro's very survival is now being questioned. In India, the Reserve Bank's objective is to keep the economy growing at a healthy pace over the long term. A sustainable expansion in economic activity with rising household incomes and increasing prosperity will result in more demand for gold jewelry and investment across India, and over a longer period.