Best of the Week
Most Popular
1. Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - Nadeem_Walayat
2.Gold Price Focusing on May Cycle Bottom - Jim_Curry
3.Silver, silver, and silver! There’s More Than Silver, People! - P_Radomski_CFA
4.Is the Malaysian Economy a Potemkin Village - Sam_Chee_Kong
5.Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - Troy_Bombardia
6.A Big Stock Market Shock is About to Start - Martin C
7.A Long Term Gold Very Unpopular View - Rambus_Chartology
8.Stock Market “Sell in May and go away” Study When Stocks Are Down YTD - Troy_Bombardia
9.Global Currency RESET Challenge: Ultimate Twist - Jim_Willie_CB
10.The Coming Silver Supply Crunch Is Worse Than You Know - Jeff Clark
Last 7 days
The Corruption of Capitalism - 17th Jun 18
North Korea, Trade Wars, Precious Metals and Bitcoin - 17th Jun 18
Climate Change and Fish Stocks – Burning Oxygen! - 17th Jun 18
A $1,180 Ticket to NEW Trading Opportunities, FREE! - 16th Jun 18
Gold Bullish on Fed Interest Rate Hike - 16th Jun 18
Respite for Bitcoin Traders Might Be Deceptive - 16th Jun 18
The Euro Crashed Yesterday. Bearish for Euro and Bullish for USD - 15th Jun 18
Inflation Trade, in Progress Since Gold Kicked it Off - 15th Jun 18
Can Saudi Arabia Prevent The Next Oil Shock? - 15th Jun 18
The Biggest Online Gambling Companies - 15th Jun 18
Powell's Excess Reserve Change and Gold - 15th Jun 18
Is This a Big Sign of a Big Stock Market Turn? - 15th Jun 18
Will Italy Sink the EU and Boost Gold? - 15th Jun 18
Bumper Crash! Land Rover Discovery Sport vs Audi - 15th Jun 18
Stock Market Topping Pattern or Just Pause Before Going Higher? - 14th Jun 18
Is the ECB Ending QE a Good Thing? Markets Think So - 14th Jun 18
Yield Curve Continues to Flatten. A Bullish Sign for the Stock Market - 14th Jun 18
How Online Gambling has Impacted the Economy - 14th Jun 18
Crude Oil Price Targeting $58 ppb Before Finding Support - 14th Jun 18
Stock Market Near Another Top? - 14th Jun 18
Thorpe Park REAL Walking Dead Living Nightmare Zombie Car Park Ride Experience! - 14th Jun 18
More on that Gold and Silver Ratio 'Deviant Conundrum' - 13th Jun 18
Silver Shares? Nobody Cares - 13th Jun 18
What Happens to Stocks, Forex, Commodities, and Bonds When the Fed Hikes Rates - 13th Jun 18
Gold and Silver Price Setting Up for A Sleeper Breakout - 13th Jun 18
Tesla Stock Analysis - 12th Jun 18
What Happens Next to Stocks when Russell Goes up 6 Weeks in a Row - 12th Jun 18
Gold vs. Stocks: Ratios Do Not Imply Correlation - 12th Jun 18
Silver’s Not-so-subtle Outperformance - 12th Jun 18
Why You Should Brace Yourself for Big Financial Changes - 11th Jun 18
Inflation to Skyrocket When Fed Reverts to New QE & Interest Rate Cuts - 11th Jun 18
Stock Market Topping Pattern or Just Consolidation? - 11th Jun 18
Study: What Happens Next to Stocks When the Put/Call Ratio is Very Low - 11th Jun 18
G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - 11th Jun 18
SPX Unshackled - 11th Jun 18
When Trump Met Fibonacci And Won - 11th Jun 18
FREE Theme Park Entry with Cadbury's Choc's! Legoland, Alton Towers, Chessington.... - 11th Jun 18
Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - 10th Jun 18
End of the World Stock Market Chart! - 10th Jun 18
All US Homes Are Overvalued - 10th Jun 18
Thorpe Theme Park London Car Park Exit Nightmare - Drivers Beware! - 10th Jun 18
Gold Price Summer Doldrums - 9th Jun 18
How to Prepare for Economic Uncertainty with Gold and Silver - 9th Jun 18
5 "Tells" that the Stock Markets Are About to Reverse - 9th Jun 18
Billionaire Schools Teacher in NAFTA Trade Talks - 9th Jun 18
Land Rover Discovery Sport ECO Mode Real World Driving MPG Fuel Economy - 9th Jun 18
Crude Oil Bullish Weekly Reversal vs. Bearish Monthly Reversal - 8th Jun 18
Fed’s Interest Rate Hike is Short term Bearish for Stocks - 8th Jun 18
The Deviant Conundrum Called Silver - 8th Jun 18
Pleasure Island Theme Park Cleethorpes, Last Day Trip Before it Closed Down - 8th Jun 18
America’s One-sided Domestic Financial War - 8th Jun 18
Debt Consolidation Advice: When and Why to Consolidate - 8th Jun 18
Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - 8th Jun 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

What Happens to Gold If the U.S. Dollar Does Not Collapse?

Commodities / Gold and Silver 2012 Dec 12, 2012 - 09:24 AM GMT

By: P_Radomski_CFA

Commodities

We follow up on our essay on gold and the dollar collapse from December 4, 2012. In that essay, we speculated what could happen with gold if the U.S. defaulted on its debt in real terms. Today, we describe possible scenarios in the opposite case where the greenback is not destroyed in spite of excessive debt.

The “imminent” collapse of the dollar has been spoken of years now. Since 2008 this talk has been fueled largely by consecutive rounds of quantitative easing (QE). With QEs at $2.25 trillion and counting, the number of borrowed dollars is hitting new highs and it’s no wonder that the ability of the U.S. to sustain such programs in the future is being questioned.


As we discussed in the above-mentioned essay, it is possible for the U.S. to default on its obligations. Not default in the technical sense of the word but in a more intuitive sense. Let’s explain that. All the U.S. obligations (bonds, treasury bills etc.) are denominated in dollars. So, the U.S. government is to repay its debt in a pre-specified amount of dollars (currently $16.37 trillion). If you consider the fact that the authorities have the sole right to print dollars, it becomes obvious that, at the end of the day, they can simply print money to cover any debt outstanding. This is unlikely, and would have disastrous consequences for the economy, but it’s possible. In such a scenario all the debt would be paid off, but the money the creditors would get would be worth near to nothing. This is what we call a default in real terms. Precious metals investors are holding on to gold as a hedge against such a possibility.

The common misconception, already pointed out, is that the collapse of the dollar is “imminent,” “sure” or “certain.” It’s not. Just as nobody knows what will happen in the future, nobody can say that the dollar will collapse for sure. And, even if somebody is personally quite convinced that the dollar is heading for the gutter, there’s absolutely no certainty when this will happen.

Even though the number of borrowed dollars has never been higher, current debt levels in relation to GDP are not at their historical highs. As of 2011, the U.S. debt to GDP ratio stood at 98.1%. The chart below shows that, in terms of debt, the U.S. economy has already been here.

In 1946, one year after the end of WWII, the debt to GDP ratio stood at 121.3%, its highest historical level so far. Obviously, the economic conditions after WWII were quite different than the conditions we have today, but the point is that in the past the U.S. economy was able to recover from enormous debt levels. It is still possible that it will recover from all the debt the QEs have been amassing.

The implosion of the dollar and the global currency system is not imminent. Can anyone – with 100% certainty – rule out the case in which the countries around the world agree to inflate all currencies gradually until the debts are mostly erased? Or – again with 100% certainty – can anyone say that nobody will come up with a solution that would not lead to U.S. dollar’s destruction?

If the widely discussed collapse of the dollar never materializes, in spite of the current debt levels, can it still be a good idea to hold on to gold? It can, particularly if you consider that we are in a bull market and there are no clear indications that this market is to end any time soon. What is more, we haven’t seen a pronounced phase of exponential growth in prices, nor have we experienced the craze of the third stage of the bull market when everybody and their brother would jump at the opportunity to buy precious metals. We provide some comparisons in the chart below.

The yellow line represents the price of a troy ounce of gold between 1980 and 2012. The solid red line is the price of gold during the 1980 top ($850) corrected for the official U.S. inflation numbers and the dashed red line is the same price corrected for inflation numbers as they would have been calculated prior to a change in the methodology of inflation calculation (accidentally, this change coincides with the 1980 top). In other words, the solid red line shows you how expensive gold would have to be to buy you the same things it bought in 1980 if you followed official data. The dashed line shows you how expensive gold would have to be if you took into account unofficial data.

As of the end of November 2012, according to official U.S. Bureau of Labor Statistics, gold would have had to trade at $2,527.24 to match the 1980 top. It traded at $1,719.00, which could imply that if the top were to be seen in the nearest future (very unlikely), gold could shoot up by 47.0%.

Taking a look at the unofficial data, gold would have to appreciate to $9,548.34 to be able to buy you the same amount of goods it did in 1980. Compared to the price of $$1,719.00 (end of November 2012), this would mean an appreciation of 455.5% (!). The target of $10,000 without the collapse of the dollar seems far-fetched, but even if the unofficial numbers exaggerate the inflation, and the latter has been so far somewhere between the official and unofficial numbers, this would mean a possible price for gold beyond $2,500.

If the bull market continues throughout the next years and plays out similarly as the previous one without the collapse of the dollar, we see the gold-going-to-$2,500 scenario as a worst case one and the gold-going-to-$10,000 as a possibility. $2,500 might be a worst-case scenario because:

  • The longer it takes for the bull market to end, the higher the nominal target will be (because of the inflation).
  • The bull market of 1980 was limited to the U.S. and Western Europe. Right now, there is a much broader audience to participate in the bull market. For instance, countries from Central and Eastern Europe, as well as China and India.
  • Technological advances have made the information flow considerably easier than in 1980. It is easier now to enter the market quickly. To reverse one’s position is just a matter of seconds or minutes rather than hours, which suggests that the volatility and price moves in the end phase of the bull market, may be substantial.

In short, if the 1980 top is anything to go by, then even if there’s no dollar collapse ahead of us, it still may be a good idea to be invested in precious metals.

This essay concludes our two-parter on gold and the U.S. dollar. If you haven’t read the first part on gold and the collapse of the dollar yet, you can do so now. Also, if you’ve read both essays and wonder what kind of approach would allow you to get your portfolio ready for both of the scenarios (the dollar collapsing and not), please read our piece on gold and silver portfolio structure.

To read the complete version of this study that is 12 times bigger and sign up for our free mailing list use the following link. You’ll also receive 12 gold best practice e-mails.

Thank you for reading. Have a great and profitable week

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

Gold & Silver Investment & Trading Website - SunshineProfits.com

* * * * *

About Sunshine Profits

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Przemyslaw Radomski Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules