Posted on 06 October 2013 Arabian Financial News
With the US Government shutdown last week weakening the US dollar across the board in global currency markets it is only too easy to read the relatively lacklustre performance of gold wrongly. For in a major US dollar devaluation crisis, like the one that would follow a failure to raise the debt ceiling on October 17th, gold would be king.
It’s a scenario played out perfectly in the penultimate chapter of hedge fund manager Jim Rickards book, ‘Currency Wars: The Making of the Next Global Crisis’. He envisages a series of ‘black swan’ events that trigger a loss of confidence in the US dollar precipitating a rush to get out of the greenback.
The last issue of our sister ArabianMoney investment newsletter has the full story. It ends with a ‘tsunami’ of dollar selling by traders in a mass panic and a switch to safe haven assets. Then the Fed responds with massive bond buying to force back the wave of selling.
However, the crucial difference between this crash and others is that the market then questions the Fed’s staying power and the dollar collapse continues. It is at this point that gold doubles in price overnight.
The US President is then left with no alternative but to take charge under the 1977 International Emergency Economic Powers Act. He nationalizes all gold held on US soil and suspends bond trading to halt the dollar’s fall. A bipartisan commission is appointed with 30 days to sort out what to do next.
Basically the US dollar has to be reissued and reset to a new value based on a much higher price of gold. If this all sounds far-fetched then it is. But so was the subprime mortgage crisis before it actually struck and yet it happened.
This correspondent can recall how HSBC chairman Sir John Bond saw the US economy as ‘fundamentally sound’ when I interviewed him just two years before this iceberg hit the Titanic .
The unsinkable can sink, and so could the US dollar, just as HSBC was the biggest loser in the subprime crisis (although the bank did not sink because its compartments held and it managed to right itself without a government bailout).
Other currencies in over-indebted economies have suffered this fate in the past. However, as Jim Rickards points out in his book the US still has a final card to play in the global currency wars as it has 57 per cent of the world’s gold reserves within its boundaries and so would command any new global monetary system as it did the old. To that extent it would not be different this time around.
But the gold price would be reset permanently higher, and $7,500-10,000 an ounce in old dollars is Mr. Rickards best estimate.