The recent slide of the U.S. dollar has reignited investor interest in gold. Tailwinds for the yellow metal have been twofold, from geopolitical uncertainty and concerns over the long-term sustainability of American fiscal policy.
The latest blow to dollar confidence came from Moody’s downgrade, as the agency cited the U.S. government’s ballooning debt load and the absence of meaningful policy measures to curb it. Meanwhile, the latest data suggest that the foreign appetite for gold has not slowed down.
China imported 127.5 metric tons of gold last month,per Bloomberg’s data, marking an 11-month high despite bullion prices hovering at record levels. This 73% month-over-month increase is attributed to the People’s Bank of China easing bullion import restrictions amid rising demand from both retail and institutional sectors. The central bank’s strategy reflects a broader global trend: diversifying away from dollar-denominated assets.
The ongoing market dynamic has intensified discussions over the dollar’s long-term dominance. While some suggest the dollar’s role as the world’s reserve currency is under threat, analysts like Samuel Zief of JPMorgan Private Bank argue that “no other currency or asset really compares to the U.S. dollar in terms of its role in foreign exchange reserves, international trade settlement, invoicing, overall financial infrastructure, and financial market trading.”
Still, Zief admits that the recent weakness reflects a cyclical recalibration, not a wholesale abandonment. “We do think this is more about a recalibration rather than capital flight,” he added per Morningstar.
Alternative theories, such as the Dollar Milkshake Theory, coined by Santiago Capital CEO Brent Johnson, argue that the U.S. draws capital from around the world, strengthening the dollar in the short term, sometimes to the detriment of other economies.
In a recent analysis, Johnson pushed back against dollar doomsayers: “Over the last 15 years, the U.S. dollar has rallied 25% versus its peers. Despite the U.S. debt getting downgraded, it’s been a huge move.” He acknowledged fiat currencies lose purchasing power, but insisted that relative to other options, the dollar has held firm.
For seasoned resource investor Rick Rule, the problem isn’t relative performance but the absolute erosion.
“I believe that the cause of this gold bull market is primarily the deterioration of the purchasing power of the U.S. dollar,” Rule said in a recent interview for Commodity Culture. Drawing a historical parallel, he pointed to the 1970s, when the dollar lost 75% of its purchasing power and gold surged 30-fold.
Rule expects gold to track the weakening of the dollar. “Specifically, I believe in the next 10 years that the U.S. dollar will lose about 75% of its purchasing power,” he stated. “It will do relatively well relative to other currencies, but it won’t do well in the absolute sense.”
His core thesis is grounded in real interest rates. With inflation-adjusted yields still negative, he sees gold as a logical store of value. “I’m not suggesting that the price of gold is going up 30-fold from here… but I do believe that the gold price will keep pace with the deterioration of the U.S. dollar,” he said.
For investors wary of volatility and systemic risks, Rule’s advice is straightforward. “A little bit of gold gives you a lot of insurance,” he said. “If I’m right, having 10% of your net worth in gold salvages a lot of the purchasing power you lose elsewhere.”
ETF Watch: SPDR Gold Trust GLD is up 27.9% year-to-date.
Read Next:
Photo by FOTOGRIN via Shutterstock
Add Comment