Gold soars as investors shift bets
SPECIAL TO THE GAZETTE
All eyes were on the loonie last week as it reached parity with the U.S. dollar for the first time since 1976.
The leaping loonie has provoked squeals of pain from Canadian manufacturers and exporters, who have beseeched the Bank of Canada to lower interest rates in an attempt to slow the dollar’s ascent.
Less noticed amid the hoopla are the travails of the U.S. buck. The housing meltdown and credit crisis south of the border have sent the U.S. dollar crashing like a stone, not just against the loonie, but also other major currencies like the euro, which broke to record highs in mid-September.
Even the sickly Japanese yen has ended an 18-month downtrend against the U.S. dollar, shooting up seven percent since June.
In fact, in early September, the benchmark U.S. dollar index—a closely watched average of the U.S. currency’s value against that of six major trading partners, including Canada—closed below 80 for the first time since 1992.
Last week, the dollar index hovered a hair above its 1992 intraday low of 78.43 for much of the week, then briefly pierced that low late in the week.
The 78-to-80 zone has been a highly watched psychological level of support for the U.S. dollar for years.
Until this month, it’s acted as a kind of trampoline for the index five times since 1991. Each time this floor was touched, the dollar ended up bouncing smartly back up.
But as the U.S. Federal Reserve Board sought to resuscitate the financial system by lowering interest rates last Tuesday, that put still more downward pressure on the dollar.
One reason: lower interest rates make
Why does any of this matter, especially to Canadians?
Some analysts have argued for years that the world’s chief reserve currency is headed for a collapse as the
A dollar panic could force the Fed to reverse course on interest rates and hike them back up to stem any sudden capital flight from the
That, of course, could kneecap the global economy as it struggles to emerge from a liquidity crisis that has rapidly spread beyond
Another blow to the dollar was struck last Thursday when
The move ignited speculation that the Gulf kingdom would break its currency’s peg to the dollar, which some analysts said could provoke a stampede out of the American buck.
The dollar’s troubles were further underscored last week by the soaring price of safe-haven gold, which hit a 28-year high above $735
The developments had one analyst predicting a gold mania unseen since the attempted French invasion of
In a Times of London story last week, analyst Christopher Wood, of
But some currency and gold analysts said the apocalyptic scenarios are overblown.
“Unless we see a vicious economic contraction in the
U.S. Fed doctrine is to let the greenback slide when faced with economic turbulence, even if it means higher inflation, Schlossberg said from his
“That’s the bet the Fed has made for the last 25 years. The key thing central bankers have learned is if they can monetize these crashes, that’s better than deflation like we saw in the 1930s,” he said.
“People would rather see high prices than high unemployment.”
But Schlossberg said the
“It’s quite likely the Euro is peaking here.”
As for the Canadian dollar, Schlossberg said it “has become the darling of the currency market. The market is telegraphing that the Canadian economy has decoupled from the
However, Schlossberg also cautioned that the Canadian dollar has shot up too far too fast, and a decline in oil prices or further bad
“The Canadian dollar tends to have very sharp reactions,” he said. “It is obviously, clearly, grossly overbought.”
Gold analyst Jon Nadler also doesn’t expect the doomsday scenario to unfold any time soon.
“The call for the death of the dollar is mostly premature,” sad Nadler, who works for Montreal-based bullion dealer Kitco.
“People wishing for four-digit gold (prices) should examine the reasons for their wish. (Such a scenario) means everything else we own has gone sour,” he said.
Nadler expects the greenback may fall a little further to 78.50, fueling a possible rise in gold to $775. But he cautioned anyone investing in gold to be ready for a vicious pullback. The historic post-war equilibrium price of gold is $400, he said, which means ample room to the downside.
“These markets move very fast,” he said. “The volatility can be expected to excite and disillusion.”
[AR: The published version of this story included charts of the U.S. dollar index, Canadian dollar, crude oil and gold since 1990.]