That kind of pro-dollar speculative positioning and confidence level was last seen thirteen years ago, at the beginning of what turned out to be a three-year rally in the US currency. UBS market observers have labeled this tectonic shift as “structural” and not some “flash-in-the-pan” passing fancy for the greenback. Doomsday predictors have repeatedly assured us all that the American dollar would be dead-and-gone by not only now, but by the end of each of the past five years as well.
China ‘quietly’ raised its US dollar-based securities’ holdings for the first time in six months this January. The dollar has climbed 1.3% this month. However, market observers also opine that a more substantial move to higher ground may not come in the US currency until the Fed actually executes its first rate hike and commences the process of exiting from accommodative policy. In the interim, the dollar will likely receive the major part of its support from continuing (and speculators hope for more of the same) improvements in US economic metrics. A CNBC survey shows a strong rise in the number of people who now believe the Fed will have to hike rates well before 2014 – as ‘promised.’
The other factor that needs to be noted at this time is the fact that, despite allegations of “printing 24/7” being issued at the rate of about one per minute by certain hyper-inflation flavored alarmist camps, the CPI levels that such publications keep warning about have not only not materialized, but are a far cry from event the levels that helped gold first achieve a record-breaking feat back in 1980. Consider the fact that in the period from 1971 to 1980 US consumer prices climbed by and average of 7.9% annually. Consider the same indicator climbing by only 2.4% per annum and never having exceeded 4% in the period from 2001 through last year.
Many “hidden statistics” followers have totally missed and misinterpreted the Fed’s act of creating reserves in tandem with the expansion of its balance sheet as effectively “printing” little green banknotes and literally flooding the economy with them. As we reported here last week, another metric-the velocity of money-has actually dipped to its lowest level in fifty years and it has neutralized the possible inflation that could have resulted from the creation of excess reserves of that order of magnitude. At this point, the removal of said excess reserves from the equation might not yield monetary growth beyond the 3 to 4 percent level. That is a far cry from the Weimar Republic and/or the Harare-on-the-Hudson scenarios so often being promised in hard money publications.
Finally, there could be a shift in gold investors’ psychology underway as well at this point in time. A former bank examiner and risk analyst, Mark Williams, who currently teaches at Boston U, wrote in a Financial Times op-ed piece that the last bull market in gold ended in 1980 with a price plunge of 60%. Mr. Williams opines that “the bubble is popping again” and that this time “gold could drop to $700 an ounce, more than $1,000 below its peak.” The author does not only take his cues from the significant slowdown in ETF tonnage demand we saw in 2011 (the lowest since these vehicles came into existence in late 2004) but also from what the retail crowd might do in the event of a loss of confidence.
To be sure, gold-based ETFs have not (yet) been tested in a gold bear market and too many have seen them strictly as a one-way demand-pull paradigm. On the other hand, Mr. Williams argues, small retail investors “tend to vote with their feet very quickly.” He sees the “class of investors who are in gold because it’s a religion, a cult, a political statement” as the one segment to be on the lookout for as it could potentially be one of the principal catalyst that will spell ‘end’ to the multi-year gold bull run.