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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Great Article!
Thank-you,
Wouldn’t Canadians have been happier still if they had bought US$, two
years ago,instead of Gold?
Good article, however I would have to respectfully disagree that the American economy is in worse shape than China’s. Regardless of how good or bad the economy is doing there, in China, there is no true rule of law and as we have seen recently, far from being a ‘free market economy’ the Chinese are at the mercy of Government, who manipulate the sharemarket and are hell-bent on devaluing the currency.
Peter Schiff made the the very valid point in an interview, that the Chinese Government should have allowed their currency to appreciate. This would have increased the true wealth of its citizens, instead of driving them to send their money overseas to grow the economies of other nations.
The short-term benefits of currency devaluation in making exports temporarily more competitive are negated in the long-term by inflation. I.e. when China devalues its currency, a Chinese manufacturer initially receives more Chinese dollars for his product when sold overseas. However, soon afterwards, the inflation caused by this devaluation makes these extra dollars worth the same amount in real terms as the fewer dollars he was getting before. Not only that, but at the same time, his savings in the bank are being eroded by inflation and he is forced to pay very high interest rates on the bonds he issues to finance expansion.
As Peter Schiff said, anyone can fail an exam (i.e. create a weak currency). It takes effort and fiscal prudence to create a strong currency (i.e. get an A+).