Bank of England’s Carney delivers dollar shocker at Jackson Hole meeting

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by Michael Kosares, Gold Seek:

Bank of England governor Mark Carney, in something of a shocker, told the recent Jackson Hole central bankers’ conference that the world’s reliance on the US dollar ‘won’t hold’ and needs to be replaced by a new international monetary and financial system based on many more global currencies,” according to a Financial Times report. The greatest impact of Carney’s bombshell, though, came not from his opinion on the look and feel of some futuristic global monetary system. It came instead from his seeming tacit approval of the escalating movement to dethrone the dollar as the world’s reserve currency in the here and now. A good many in that audience were no doubt surprised – even rattled – by Carney’s remarks.

“Something is going on,” said St. Louis Fed President James Bullard in a Financial Times report, “and that’s causing I think a total rethink of central banking and all our cherished notions of what we think we’re doing. We just have to stop thinking that next year things are going to be normal.” To which FT added: “Interest rates are not going back up anytime soon, the role of the dollar is under scrutiny – both as a haven asset and as a medium of exchange – and trade uncertainty has become a permanent feature of policymaking.”

That about sums it up.  The dollar at the moment is something of a Humpty Dumpty in the global monetary system – sitting on his wall oblivious and seemingly immune to all that goes on around him.  Whether or not there will someday be a Great Fall remains to be seen, but increasingly, as Carney’s speech illustrates, forces are lining up against it.

“[H]istory,” Carney concludes, “teaches that the transition to a new global reserve currency may not proceed smoothly. Consider the rare example of the shift from sterling to the dollar in the early 20th Century – a shift prompted by changes in trade and reinforced by developments in finance. The disruption wrought by the First World War allowed the US to expand its presence in markets previously dominated by European producers. Trade that was priced in sterling switched to being priced in dollars; and demand for dollar-denominated assets followed. In addition, the US became a net creditor, lending to other countries in dollar-denominated bonds.”  In other words, it laid the foundation for the so-called American Century that followed.

A similar transition now could impact the dollar and dollar-denominated assets just as it did sterling and sterling-denominated assets at the turn of the 20th century. Though few believe the dollar can be fully replaced with something else at this juncture, many believe that its influence could erode – or that the old could gradually give way to something new and different.  In fact, as you are about to read, some see it as a process that has already begun.

De-dollarization boosts central bank gold purchases 

Among the broad effects of the nascent de-dollarization movement has been to significantly boost central bank demand.  The World Gold Council reports 651 metric tonnes in new gold purchases during 2018 – the highest level since the Bretton Woods Agreement was abandoned in 1971. China, Russia, Poland, and Hungary head the list of central banks adding gold to their central bank reserves in 2018 and 2019.

In a recent interview with the World Gold Council, Dr. Duvvuri Subbarao, former governor of the Reserve Bank of India, explains the connection between “de-dollarization” and central bank gold acquisitions. “In the immediate aftermath of the crisis,” he says, “we had to sell dollars to prevent our currency going into freefall. During Quantitative Easing, we had to buy dollars to protect our financial stability. And when the Federal Reserve began to taper QE, exchange rates slumped again and we had to defend ourselves with our reserves.  All these events prompted one obvious question – is there an alternative to the dollar?”

“It is clear,” he goes on, “that gold is a risk diversifier – a hedge against not just financial risk but also political risk. It is also a long-term store of wealth. As such central banks, especially those from emerging markets, can increasingly see the merits of adding gold to their reserves. Over time, therefore, I am confident that gold’s role will increase among central banks.”


Chart courtesy of the World Gold Council

Currency problems stoke Asian physical gold demand

McKinsey & Co, the global consulting firm, warned in late August that a new Asian debt crisis might be in the making. Not surprisingly, gold is priced at all-time highs in a number of Asian currencies including the Japanese yen, India rupee and the Chinese yuan. It is also at all-time highs against the Malaysian ringgit and the Indonesian rupiah. Jayant Bhandari, the founder of Capitalism and Morality, provides some thought-provoking insights on the origins and sustainability of Asian gold demand. “Most of these people don’t really understand what is happening outside their boundaries,” says Bhandari, “so they have no option but to buy gold, silver, and currencies of Western countries. And that is why I think support for precious metals will continue to increase going forward. I don’t know what influence it will have in pricing, but really, if I had to suggest to someone on how to preserve his wealth, my suggestion would primarily be focused on gold and silver.”

Mobius, Soros take seats on the gold bandwagon

Question: What do Jeffrey Gundlach, Ray Dalio, Mark Mobius, Stanley Druckenmiller, Paul Tudor-Jones, David Einhorn, Naguib Sawiris, Paul Singer, and Thomas Kaplan – some of the greatest financial minds of a generation – all have in common?

Answer: An attachment to gold and its presence in their personal financial holdings as a safe-haven hedge.

Well-known emerging market analyst Mark Mobius is a recent addition to the list. “Investors,” he says in an interview posted at NewsMax, “should allocate about 10% of their assets in physical gold. The reason is that gold maintains its status as a currency – a currency that has stood the test of time.” George Soros, according to Sharps Pixley’s Lawrie Williams, is another new addition to the list having made “a very substantial investment in the yellow metal.” Gold ETFs, the favored ownership vehicle for the hedge funds, have grown 24% since May and are at their highest level since 2013.

Chart courtesy of GoldChartsRUs

“If I had to pick my favorite for the next 12 to 24 months, it would be gold. If it goes to $1400, it goes to $1700 rather quickly. When you break something like that [the 75-year expansion of globalization and trade], a lot of times the consequences won’t be seen at first. It might be seen one year, two years, three years later. . . So that would make one think that it’s possible that we might go into a recession or make one think that it would make rates go back toward the zero bound level and of course in a situation like that gold is going to scream.” – Paul Tudor Jones, Tudor Investment Corporation  (Bloomberg interview)

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