Goldex Heartbeats: Is a dollar crash coming?

Goldex Team

Editorial content

Market volatility returned in recent days with the Coronavirus, of course, blamed: Beijing has shut all schools to counter a nascent outbreak, while globally cases are still rising in emerging markets – especially in Brazil, where there has been almost zero action by the Federal Government:

Beijing closes all schools, bracing for a 2nd wave of the coronavirus

Accordingly, the Volatility Index, also known as the Fear Index, started to rise once again. And Gold holds up very well indeed:

Due to all these negative economic impacts, as well as stimulus and Fed action (there was another new program this week) this could be seen as negative for the US Dollar, and thus positive for Gold:

The Fed begins purchases of up to $250 billion in individual corporate bonds

This now allows the Fed to buy Corporate Bonds which has brought out all the bearish USD experts:

If this reality manifests itself then of course the Gold price will fly even higher. However, the lack of an alternative to the USD suggests that such a process, if it indeed ever occurs, would require a commensurate currency with similar power, status and adherence to the rule of law. And at present, no such alternative exists. Furthermore, trouble seems to be brewing again in Asia, and it’s not just Hong Kong.

Away from the Coronavirus and its health and economic impact, geopolitics is coming back to the fore once again. Both stories involve China as the regional power.

The ongoing saga on the Korean peninsula has taken a severe turn downwards once again. This never-ending story, which looked like it could take a more positive turn last year, has once again opened up a flashpoint. With the US in no mood to make diplomatic concessions after so much political capital was spent last year coupled with US-Sino relations having deteriorated so much it seems unlikely that a quick resolution can be found. Such symbolism is very significant and with a more assertive China, North Korea perhaps has a newfound confidence to push the envelope further than before. Ratcheting up of tensions, especially during this time of crisis, will be a seen as unnecessarily provocative and garner little sympathy from the rest of the world.

A similar situation has also caused exasperation in the international community. With some news outlets reporting 43 Chinese dead, and 20 Indian fatalities, this will be the deadliest confrontation between the two BRIC powers in decades. The world’s two most populous nations – nuclear powers with their own regional ambitions – engaging in a violent confrontation in this way creates huge risk for the whole world at this time:

“Sino-Indian relations can never go back to the old normal,” said Ashley Tellis, an India scholar at the Carnegie Endowment for International Peace. “They will reset with greater competitiveness and in ways that neither country had actually intended at the beginning of the crisis.”

Everywhere there are old issues unresolved, and new issues where policymakers are not even asking the right questions, let alone are able to find the correct answers.

Within the US the very essence of a nation is under pressure because of consistent failure by US administrations of both political parties to resolve race relations and rampant inequality. There is something fundamentally concerning when the tech sector reaches an all-time high in the midst of a global pandemic and race protests after the killing of an unarmed black civilian.

Internal political structures in the West are being challenged like no time before. The expectations of the public are not being responded to quick enough. This is the case whether it is pandemic protection, negative interest rates, the slowing ebbing away of capitalism, or the belief that printing money is somehow a good, sound and sensible idea.

Externally, the Western world of intergovernmental relations faces an unprecedented challenge. Norms and rules are being ignored, the US has withdrawn from the WHO and the relevance of the World Bank and IMF are being questioned. Indeed, just this week the UK Department for International Development was folded back within the Foreign Office. The retreat back to a nation’s own borders is a continuing theme.

Pressure from the inside creates withdrawal from the outside. With a system in such chaos and flux it is no surprise that Gold continues to be so resilient.

Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.