BRICS probably won’t be able to dethrone King Dollar, according to Morgan Stanley currency traders. There’s only one small problem with their argument…
From Peter Reagan at Birch Gold Group
This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Morgan Stanley’s views on gold and the U.S. dollar, gold’s correlation to bitcoin and copper is misunderstood, and why is the Royal Mint downsizing despite record demand?
Morgan Stanley says gold will go to $2,600 soon (but not because the dollar is going anywhere)
Morgan Stanley is skeptical that the U.S. dollar could be replaced, and with good reason. The bank’s head of FX strategy for emerging markets, James Lord, recently asked Morgan Stanley’s Thoughts on the Market podcast a crucial question: Which currency do they want to own when the global economy sinks from merely bad to worse? It’s an intriguing conversation, even though it’s flawed.
Lord splits hairs a bit in his defense of the dollar:
“It has the potential for cyclical decline if and when the Fed cuts interest rates but will still be bolstered by its enduring dominance as a reserve currency. It’s still the favored choice for central bank allocations, global trade financing, foreign exchange activity, cross-border lending and debt issuances.”
By the way, “cyclical decline” means the downturn which naturally follows a period of advancement. In other words, business as usual rather than something new.
Now, Lord’s defense quoted above is true, as far as it goes. The U.S. dollar is the most liquid currency on the planet, and that liquidity is quite attractive for transactions. For spending, in other words – does that mean it’s a good store of value?
Not in the least! Other than liquidity, the only thing the dollar has going for it in the international currency marketplace is that it hasn’t been wrecked as thoroughly as the euro, pound sterling or yen.
Lord doesn’t really bother much with counterarguments, such as the $35 trillion debt pile. But even that makes some kind of sense. If every other country has an outrageously huge and totally unpayable heap of debt, why care, right?
The firm’s head of U.S. public policy research Michael Zezas went a step further and called the greenback “King Dollar.” In my mind, that’s awfully close to saying, “In the land of the blind, the one-eyed man is king.”
Again, it does make sense in some ways. If you’re a currency trader, and your only choices are a smorgasbord of rapidly-inflating currencies, of course you’d pick the least-bad option. That doesn’t make it a good choice!
Having said all that, it’s refreshing to see some skeptical takes on BRICS and their dedollarization plan. Despite our extensive coverage of it, we’ve been somewhat BRICS-skeptical ourselves, especially pertaining to the currency. As we have pointed out, the BRICS nations are infamous for currency mismanagement, and there’s little reason to expect anything from any kind of BRICS currency unless it’s backed by, and convertible into, gold.
We’ve all seen the announcements of a gold-backed BRICS currency from last year – which turned out to be fake. Basic propaganda. They’re constantly hinting at a currency revolution, but nothing concrete materializes. One of two scenarios must be the case:
- Either BRICS are bluffing and they’ll remain haphazard with their currencies decades from now
- They have a gold-backed BRICS currency (like The Unit) prepared and are deliberately obfuscating the rollout so they can build up their gold reserves as much as possible in the meantime
For now, Morgan Stanley’s take is correct for the most part. If you must own currency, you should probably own the least-bad currency.
Gold investors shouldn’t lose sleep over the U.S. dollar’s global reserve currency status because they’ve diversified beyond dollars.
Elsewhere, Morgan Stanley forecast $2,600 gold by the end of the year. Gold going up means that the U.S. dollar is going down, right? But it’s just a “cyclical decline”…
So what changed for King Dollar between 2013 and now? Gold has doubled its dollar price over that period. Therefore it’s a question anyone who owns dollars should be asking.
Despite their bullish forecast, Morgan Stanley’s key personnel seemed to ignore the idea of diversifying with gold. They speak as if there’s no alternative to owning declining currencies!
Nonsense. Currency traders trade currencies – that’s their expertise. They talk their book. Physical gold bullion isn’t in their book, so they can’t sell it to you, so it doesn’t exist.
But any Birch Gold customer can tell you, there is an alternative to owning steadily-depreciating currencies. Whether or not Mr. Lord at Morgan Stanley mentions it.
Bitcoin and copper investors worry about gold’s rise, but not for the right reasons
Bitcoin bulls are being warned to exercise caution because the price of gold is rising. Same for anyone interested in copper. Why?
For starters, copper’s slide relative to gold is being misinterpreted and oversold, in a sense. The copper-to-gold ratio is being called a key indicator of economic health and the state of the global economy. The rationale for this is that less copper demand means less economic activity, but demand isn’t actually mentioned. Rather, we’re supposed to believe that copper being “cheap” relative to gold implicates this lack of activity.
The relationship to bitcoin is even more tenuous, as the same analysis purports that bitcoin stands to suffer from this just on the basis of being a risk-on asset. But is it even that? Many people don’t view bitcoin as a risk-on asset: they view it as a safe haven. That’s why we have all the crypto kids calling it “digital gold.” So the idea that bitcoin must fall because gold is expensive relative to copper seems like a stretch on top of a stretch.
In the last few years, we have seen gold uncouple from everything to the upside. It has shown the ability to gain alongside any asset that is its direct competitor, gain amid a bout of dollar strength, and outperform in environments that are seen as traditionally non-conducive for gold prices as anything. By standard opinion, gold should be on thin ice during a summer with the highest interest rates in decades. But the opposite happened.
The copper-bitcoin-gold analysis seems to miss a key point: Gold is money. Gold isn’t just a safe haven asset or an indicator of economic strength. Gold is, simply put, the default form of money throughout human history. Period!
When we shift our thinking from “gold as asset” to “gold is money,” we also understand that its relationship to copper isn’t that important. Nobody claims that bitcoin will drop because copper has grown more expensive, so why use that as an indicator when it comes to gold?
There is certainly an argument that bitcoin’s spikes up directly correlate to inflationary spikes, but the analysis doesn’t really mention that. Instead, it seems to treat gold as just another commodity to be traded. In reality, gold is the foundation of the global financial market whether economists or analysts admit it or not.
Royal Mint makes biggest changes in 1,100 years – what’s going on?
The U.K.’s Royal Mint is making truly radical changes. It will import blanks instead of making them, significantly downsize staff and focus on recycling gold. And apparently, digital money is to blame for all of this.
“It’s sad, it’s the way the world is going,” said an anonymous source within the Royal Mint. “People are using fewer and fewer coins. If people see that the Royal Mint is being shut down, they might start using coins again.”
Because the problem the Royal Mint faces isn’t with its precious metals coins – its silver Britannias and gold sovereigns are in high demand. The Royal Mint is losing money on its circulation coins, the pennies and dimes and £1 and £2 coins intended for vending machines and piggy banks:
This follows news that the Treasury has not placed any new orders with the Royal Mint for one and two pence coins this year due to a decline in cash usage.
Today, the Royal Mint purchases steel, which factory workers roll to the correct gauge, press into pieces and coat with copper or nickel.
But that will no longer be the case and he is now looking to sell his coin blank production facility, This is Money has learned.
“Decline in cash usage” means they’re blaming cashless payments. (Do we have a problem with digital money when it relates to, for example, bitcoin? Of course not.) Furthermore, the Treasury isn’t ordering the two smallest denominations of coins, one and two pence (about $0.013 and $0.026 in American money).
First off, pennies are useless. It costs more to make a penny than they’re worth in the U.S. and I’ve no doubt the UK faces the same situation. Second, as Ron Paul pointed out, this is an inflation problem. The problem is not a “decline in cash usage,” but a decline in purchasing power rendering these tiny slivers of purchasing power obsolete.
Don’t misunderstand me here. I’m not arguing the penny or the one and two pence coins should be produced at a loss just for tradition’s sake. Rather I want to point out that every step we take towards a cashless society is another step farther away from real money. I’m not even going to mention the loss of privacy and everything else that comes with a cashless economy, which is a problem all of its own.
For now, we are focusing on how people view and interpret the idea of money. Not too long ago, to make money, you had to mint it. It was worth its metal content in the most literal sense. There was no price fixing or fudging. You could have price depreciation during good mining years, which would be a good thing for people who weren’t indebted. The purchasing power of money sometimes rose and sometimes fell, unlike today, when constantly falling purchasing power is the cornerstone of the Federal Reserve’s mandate.
It was too tempting not to go with banknotes because they were that convenient, and redeeming them for real money was always a matter of a short trip to the bank. That’s what a bill is supposed to be, after all: proof that you own so-and-so amount of gold.
Then things got more and more out of control. Gold was decoupled from the same IOUs it was supposed to be redeemed with. The IOUs became money. And as if that wasn’t enough, now even the paper that holds the IOUs is becoming burdensome. If one is to jokingly say that paper money came about because moneysmiths got lazy, what is to say about turning paper bills into a number on the screen?
Every criticism that free-floating cash has gotten applies a hundredfold to digital money. It is that much easier to manipulate and create out of thin air, to speak nothing about centralization and lack of citizen sovereignity.
So while the struggles of the Royal Mint seem to indicate cash is going away, we’re almost getting the opposite vibes from the story. Somehow, some way, the world has to return to money with value. Perhaps it has to be done through hard lessons and extremes. Maybe, when we’ve stooped so low that our wealth never amounts to more than numbers on a screen controlled by a third party, can we finally start making our way back to coinage or, if nothing else, a tethered paper currency.
Lots of other things from the Royal Mint story are interesting, like this addition from the source mentioned above:
Once the facilities are broken down and gone, they’ll find it very hard to start them back up.
This sounds exactly like the issues miners face, and ones that they have especially had to deal with since 2011. We know that, today, the mining sector is experiencing significant losses despite the price of gold being on a historic run.
Even the focus on recycling suggests that gold ore is getting difficult to come by.
Mining is difficult and expensive, and now minting, too, isn’t returning a profit. But it’s exactly this effort that made money valuable to begin with. Gold became money because it’s rare, difficult to find, difficult to process and the most chemically perfect metal.
So long as the Royal Mint continues making its flagship gold and silver coins, they’ll be okay. Their financial struggles are the result of trying to convince the British people (who invented the gold standard!) that coins stamped from base metals, copper and nickel and steel, are still worth using. That’s an uphill struggle.
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