By John Patterson.
John Patterson
I have been asked to write this column on the basis that it should be relevant to the readership – i.e. not just “stolen” from the internet, and that it shouldn’t just promote what I do for a living! I will aim to do just that, focussing on the specific needs of ex-pats living in Azerbaijan and the information I provide will be (as far as possible) even-handed, leaving you to decide what to do with it…
Playing Devil’s Advocate
The first part of “the deal” is easy, I just write a load of nonsense every month and I certainly won’t have copied anything however, that would then do the opposite of main purpose, which is to meet your needs. So what I will be aiming to do will be to play the devil’s advocate. I certainly have opinions (that are not always correct) and as such, will present then as my personal views on what is going on with US$, the Euro and Gold. These are topical issues in the financial world right now but as I say, the words in this column are provided without prejudice and simply represent my personal views.
The Euro – Bad Times a Coming
When the Euro was launched 11 years ago, it exchanged at 0.87€ to the US$, now (30/9/2011) it is valued at 1.35€. Moreover, until three weeks ago it was still above 1.40€, a rise of 60% over 11 years. This is despite the fact that over that periods, the European Union amassed more and more debt and is now on the verge (apparently) of monetary union collapse. What is not really explained by economists and others, is that any austerity budgets being introduced by EU member countries will not actually reduce the amount that will be spent each year. So, whilst we are definitely heading for a financial meltdown without these measures, the bad stuff will continue for a long time to come…
The US$ – Another currency in decline
The US$ has been in decline for over 10 years now. Those of you who are paid in US$ have no doubt have been pleased with its recent rally. The problem for the US$, is that the reason for its declining value (a 60% loss against the Euro in 11 years) is that America is spending more than it earns and as such, continues to head towards bankruptcy. With a President who wants to spend substantial sums on healthcare and a Republican Party that wants to reduce spending in the same area (but to keep up spending in others - like the military), there is a political impasse. The dollar’s recent rise only reflects a market view that the Euro Sovereign Debt problem is bigger (right now) than that of the USA!
Is the Euro-zone heading for bankruptcy?
That the Euro-zone is heading towards bankruptcy is a possibility and I think that in terms of Sovereign default, the market seems to believe that there is a likelihood that Greece will not be bailed out fully in the future. If that happens, its creditors will lose substantial amounts of money…
Now if you accept what is written above, you must conclude that to be holding Euros is a bad idea at this time and things seem to be getting worse!. The alternative approach would be to invest (or be paid) in US$, however that doesn’t appear to be a very sensible thing to do either, given that the USA’s ability to repay its debt was downgraded by Standard and Poor’s to AA+ in August… Soon afterwards, the legal limit to which the USA can borrow was raised, so that doesn’t make the argument for the dollar to strengthen a good one. This is especially true given an administration that seems unable to act decisively or do anything to effectively slow down the spending pattern.
A currency ultimately tells you how fiscally strong a nation is. The fact that the Euro is so high, shows how bad the US currency is doing and also that people are really unsure of what to do.
So, what about gold?
So investors have been buying Gold, a completely useless metal; unless perhaps you have had an argument with your wife – still useless if it was a big argument because then of course you need diamonds (this rule only applies for women, all that men need to be placated is the provision of sex, obviously).
The price for Gold today (30th September) is $1,624.55 per ounce. Anyone who bought it a month ago (August) has lost 11%. Indeed, it has dropped from its 2011 peak value by about 15%. This loss relates to the rise in the US$, and is probably caused by liquidity issues. In other words, all of a sudden people needed cash…
Replacing gold with “trust”
In 1971, the US came off a thing called the Gold Standard. Essentially, the US had to hold physical reserves of the stuff, equal to the number of dollars in circulation. As more and more dollars came into circulation, this became impossible. So the strength of US$ against other currencies became the “trust” upon which its value was based. That trust is being eroded and not just for the simplistic reasons described above. So, the price of Gold has risen more or less on the basis that there is no “safe haven” for money to flee to. It really does reflect the sad fact that we are in a very serious financial mess that will affect everyone in the World for a long time to come.
Is the rise in the value of gold a “bubble” that will inevitably burst? Personally, I don’t believe so. I also believe that in the immediate future, the dollar will weaken further after an initial period of strengthening in the wake of uncertainty over the future of the Euro-zone. Is the US$ going to get weaker? Probably in the immediate future, will it regain its strength? Not for any long or sustained period against most world currencies, but against the euro – a strong probability
Then again, what do I know?
