‘Dump the dollar, buy whatever’ now appears the dominant mantra in financial market.
Investors believe the greenback is now caught in a downward spiral because the US Federal Reserve will keep applying fresh rounds of monetary stimulus in an effort to combat the sluggish US economy.
Some investors argued that a recent Wall Street Journal article raised the prospect that the US Fed could be buying $100 billion of US government bonds a month in perpetuity. According to Peter Schiff, head of broking firm stock Euro Pacific Capital, investors have adopted the view that additional monetary stimulus means that “money is going to lose value, so get rid of it”.
He told the WSJ: “One way you get rid of dollars is use them to buy stocks.”
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But, of course, another way to get rid of US dollars is to buy gold. It’s hardly surprising then that gold hit a fresh record high in US dollar terms yesterday, closing at $US1306.60. So far this year, gold prices have climbed nearly 20%.
The surging gold price no doubt added to the euphoric mood at the London Bullion Market Association’s conference in Berlin. A survey of delegates attending the conference — which has a good track record in predicting future gold price movements — tipped that the gold price would rise to $US1,450 a troy ounce in the next year.
Of course, some analysts are tipping that gold prices will climb above $1500 in coming months, as investors fret about the weak global economy, and increasingly frantic efforts by central bankers to stoke economic growth. And those investors who despise the greenback sufficiently strongly have set aside concerns over the debt-burdened countries of Ireland and Portugal, and are buying euros. As a result, that currency has climbed to $1.3565.
But this could be short-term. Ireland is struggling to cope with the cost of propping up its banking system after a disastrous property market collapse. So far, the government has spent about $45 billion — or one-fifth of Ireland’s GDP — on bailing out the banks.
But Ireland’s economy is struggling. The country’s GDP shrank at an annualised rate of close to 5% in the second quarter, raising doubts whether the country can afford to pay for more bank losses.
Ireland’s high levels of borrowings — the country’s total debt stands at five times Irish GDP — means that the Irish troubles will spill over into the rest of Europe. UK and German banks are the country’s biggest lenders.
At the same time, the Portuguese government is facing strong opposition to its plans to raise taxes and bring its budget deficit under control.
The dire financial predicament of these two countries has caused their borrowing costs to sky-rocket. Yields on Irish and Portuguese 10-year bonds are trading close to their highest levels since the introduction of the euro. And higher borrowing costs are adding to the financial pressures of these debt-laden countries.
In time, investors may well be forced to reassess their hatred of the greenback.
*This article originally appeared on Business Spectator