Looking at Gold Without the Dollar Blinders
If you want to see the value of gold in a currency crisis, just look north.
When people tell you “gold is down,” you should always ask an important question: compared to what? If you bought gold in Canadian dollars (CAD) last year, you’re probably pretty happy. Gold is up 7.9% in the Great White North, and 17% over two years. Even if you bought gold in Canadian dollars five years ago, things still look pretty good. The price is up a healthy 5.8%.
We tend to talk about everything in terms of dollars, but the USD is not the only game in town. And the bullish market for gold when looking at it in Canadian dollars reveals the yellow metals intrinsic value. It historically protects wealth during a currency crisis.
The Canadian economy depends on commodity exports, particularly oil. The precipitous drop in the oil price has pummeled the Canadian currency. In fact, over the last couple of years, it’s been in a virtual freefall compared to the US dollar (USD), dropping from 0.94 to 0.72 CAD per USD.
So from the Canadian perspective, gold is doing exactly what it is supposed to do: protecting wealth during a currency crisis.
In fact, it’s not only Canadian gold owners who are happy. Over the last year, gold is up 10.5% in Russian rubles, 5.5% in Mexican pesos, and 18.9% in South African rand.
When the USD is strong, our dollar bias can blind us to the long-term value of gold. Investors need to remember that the dollar can move into crisis mode with little notice, just like any other currency. Just because it’s strong today doesn’t mean it will remain strong tomorrow. In fact, there is good reason to believe we are currently in the midst of a dollar bubble that could blow up and send us into a crisis at any time.
Last August, the Chinese devalued the yuan, which is pegged to the US dollar. At that time, Peter Schiff argued that eventually the dollar bubble will pop:
The Chinese currency has increased in value dramatically over the last several years, along with the US dollar. This move was motivated not by the exchange rate between the yuan and the dollar, but between the yuan and all the other currencies. The dollar is in a bubble right now. The dollar is very overvalued, and since the yuan was pegged to the dollar, that currency rose along with the dollar. This is a very small devaluation, which I think is only temporary… I think this dollar bubble is going to burst. Our economy is in much worse shape than the Chinese economy.”
When the dollar falls into crisis, Americans who own gold will likely be pretty happy with their investment, just like Canadians are today.
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