Hopes of a Gold Spike In Dollar-denominated Terms Are Just That – Hopes! Here’s Why

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There is little inflation in the USA because, [while]…the money supply is indeed growing from QEternity, the money is not exactly changing hands in transactions and chasing goods and services. Increased transactions is what drives inflation, so lower velocity of money leading to lower transactions is suppressing inflation, even in the face of rising money supply. For more details on the velocity of money and its impact on inflation, please read my article on why hyper-inflation is a myth.

Inflation is not the only thing that drives currencies, however. The U.S. dollar may still crash against other major currencies if the exchange rates are not aligned with the core value of the two currencies in question. One way to measure it is using Purchasing Power Parity (PPP) which is an economic theory and technique used to determine the relative value of currencies, estimating the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to (or on par with) each currency’s purchasing power. It asks how much money would be needed to purchase the same goods and services in two countries, and uses that to calculate an implicit foreign exchange rate. One whimsical, but popular way to measure PPP is the Big Mac Index…. [Read: The Big Mac Index Reveals the REAL Facts On U.S. Inflation!]

For the U.S. dollar to crash against another currency, the currency has to be undervalued with respect to the dollar. It would also help if the currency that the dollar would crash against is a major world currency, so that it can actually absorb all the dollar outflows. The natural candidates are the euro and the yen – any other currency is simply not in the same league as the dollar when it comes to market size and liquidity. Yet, as the Big Mac Index shows, the euro is already overvalued against the dollar, and while the yen is still a bit undervalued, it is unlikely that the Bank of Japan will let the yen rise, given that the country is betting on a weak yen to recover from its own recession.

The Big Mac Index is not exactly what solid economic analysis is based on… [but a look at] the Organization for Economic Co-operation and Development (OECD) numbers [below show that] a basket of goods and services costing $100 in the USA would cost about 15% more in France and 8% more in Germany, which means the euro needs to come down by 8-15% for Purchasing Power Parity to be reached. According to the table below, France, Germany, and Japan, have currencies that are overvalued with respect to the U.S. dollar [suggesting that] the euro and the yen should weaken against the dollar instead of the dollar crashing against either of the two.

Also, there is a real quantitative easing going on out there in all the major countries. All these countries are trying to work their way out of the global recession by increasing money supply. Rumor is that the G-7 nations are soon going to come out with a coordinated statement stating that all of the G-7 nations will start to pump money into their respective economies, and not cause respective currencies to crash against each other [thereby averting any suggestion of a so-called currency war. Read: Is the First of Many Currency Crises Just Now Unfolding? Are Gold & Silver About to Take Off As a Result?]

Bottom line, chances are bleak that the dollar is going to crash anytime soon. This is not good news for gold bulls, of course, as inflation is not in the horizon either.

What does this mean for your investment thesis for the rest of 2013, dear reader? Well, my projection for gold prices in 2013 remains unchanged, that shorting gold — especially via the miners…remains the play for 2013. I think the miners are really setting up to be perma shorts with falling gold prices and rising mining costs.

Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://seekingalpha.com/article/1175981-the-rumors-of-a-dollar-crash-and-gold-spike-have-been-greatly-exaggerated

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