US Dollar : On the Edge of the Abyss and Back to Gold Standard

The US Dollar's value has been steadily eroding over the recent past. Intervention by US government and other countries like China has stopped in free fall. But it seems China is slowly evolving a strategy to reduce its exposure to the dollar by buying US stocks. Experts say that this could level GOLD being considered as the standard currency once again.


1. US Government : there is one fan of the USD, a fan that will try and keep the dollar u1. p or at least “manage” its invertible collapse. That of course is the US Government. Armed with Ben Bernanke’s Plunge Protection Team, you can bet you bottom dollar (although shortly it might not be worth much) that they will do everything possible to make sure their currency does not have a full blown crash. They would rather that USD gradually floated down in a way that would benefit US exporters. Trying to manipulate the market is a dangerous game, as no person, company or government is bigger than the market and eventually the market will fight back and win.

In fact the more an entity tries to suppress something, whether this be the financial market or something as simple as an idea, the more drastically the suppressed force will fight back. Therefore all the Plunge Protection Team are doing by trying to prop up the dollar or the stock market is delaying the invertible and making the backlash reaction all the more dramatic. You can try to push the bad times back, but this will just make the bad times worse when they eventually come around.

2. China Factor : It is crucial to remember that the United States on America is not the only government with an interest in which way the dollar goes. With their hands on over $1.2 trillion dollar bills, the Chinese Government must also be watching the USD like hawks having lost $100 billion of value in less than a year. The government in China is very concerned at keeping “social unrest” at a minimum so how do you think the Chinese people will react if the USD continues declining further and further down bringing their foreign currency reserves closer and closer to worthlessness. China must be looking to transfer their dollars into something that retains its value or perhaps even increases in value, after all isn’t that what investments are supposed to do?

China will look to get out of dollars and into anything that isn’t falling as fast as the USD. The private equity group Blackstone, made the biggest US IPO of the year recently and Beijing swiftly swooped in and bought a 9.9% stake in the company, using $3 billion of its foreign exchange reserves. It is likely that we will see more examples like this of China buying companies, commodities and whatever they can to get out of the dollar. Gold and silver bullion or the mining companies in the precious metals industry are obvious candidates for a piece of China’s USD pie as they move up and as the greenback moves down so they are the most logical hedge against a declining dollar.

3. GOLD as the Basis : If China and other countries holding large USD reserves shift even a small proportion of their dollars into the precious metals, it will have massive effect on gold prices and silver prices. Governments aside, individuals around the world will be looking to trade any dollars they have for a piece of gold or some gold stocks rapidly increasing in value.

Reference :

US Dollar : On the edge of abyss