The $/Euro Struggle will Destabilise Forex Markets - Then Call for Gold's Support!

By: Julian D. W. Phillips | Thu, Dec 4, 2003
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The $ is weak, other currencies are petrified of being strong against it because it cuts down their trading advantages. Demands for their goods from the States is swelling as the recovery gains pace. The U.S. Administration has been weakly calling for other nations to let their currencies strengthen against the $, under the guise of allowing 'greater flexibility' in foreign exchange rates.

But there is persistent resistance to this, why? The world has been leaving its savings in $ and has suffered a + 50% loss so far. Eventually, losses may be far greater than this, as the $ falls. But despite public intentions of wanting a strong $, the U.S. wants a weaker $. The intrinsic [?] value of the U.S. $ is sinking, by the day, as the $ continues to be over-issued, in the interests of keeping the economy "growing".

In a myopic posture, the U.S. Administration is focussing on internal interests to the detriment of the external value of the $. Whilst it believes it needs to import less and export more, it has not reacted to the growing trend of the falling levels of imported capital, so the $ keeps falling further and faster down its present slippery slope.

Rightly, the Administration believes the globe needs a healthy U.S. economy, which is the driver of the global economy, and the backing to the global reserve asset, but history shows that trade deficits grow alongside a growing U.S. economy. As a consequence the $ keeps falling and will do so until it becomes an important issue, which it is not, and is not likely to be so until it is considerably lower, or after the elections. As the rest of the world, "bites the bullet" quiet steps are being taken to lower the effect of such benign neglect of the $.

Enter the Euro!

The first move!

In the last month, if we are to believe the German government officials, a deal has been struck to price Russian oil to Europe in Euros some time back! Russia has yet to confirm it. The Russian view of the Euro is well expressed in the climb over the last year plus of the Euro content in Russian reserves from 10% to 25%. The % of global reserves of the U.S. $ has dropped from 76% to 68% and the trend seems set to continue if not to accelerate! This alone is giving the Euro the credibility it lacked.

Not too much drama at this stage you may say? On the contrary, we say! This trend has the potential to knock the $ off its perch and eventually force the U.S. Monetary authorities to give value for its currency, or see it tumble in a series of crises, the like of which has not been seen since 1968 onwards and through the early 1970's. This time the day of reckoning of the value of the $ will be the result of 30 years of over-issuing of the U.S. currency. The crises will likewise be the greater. The availability of the Euro as an alternative, not under U.S. control, will break the grip of the $ on international money flows. The attempts by the I.M.F. to have the S.D.R. take this role ended in obscure failure some time ago, despite its continued existence in the international monetary system.

The game plan unfolds!

The potential for a real weakening of the $'s global reserve asset role, is staggering. This pricing of oil in Euros is essentially a refusal to accept the $ in its reserve asset role. However, Russia and Europe's actions, will have several subsequent stages of reactions, all of them destructive to the present $'s role globally and each one progressively more destructive: -

 •  The next step in this progression could well be a decision by some Oil producing countries decide price their oil and be paid, in Euros, initially to Euro related nations, then to nations who have to buy $ first, to buy oil.

 •  The next level of instability will be reached as an actual "switch" from trading goods in $, to trading goods in Euros. Russia has started this trend with vigour.

 •  This will inevitably lead to a capital flow away from the States and an exacerbation of the Balance of Payments deficits and further $ crises.

 •  This, in itself, will encourage further switching of $ reserves to Euro reserves, to prevent further lessening the value of the foreign reserves of other nations.

 •  These moves will set the basis for the global economy for decades and more, far into the foreseeable future.

Looking out from the Fed

Alan Greenspan, the Chairman of the Federal Reserve, must be troubled as he watches the currency, of which he is one of the guardians, facing such an uncertain future. Knowing that future events may be the whirlwind sown from the winds, which began to blow in the 1970's and have become as controllable as a ball of mercury rolling around in the palm on his hand.

Having watched the decades long power play of the U.S. $ in its rise to, not simply the key global reserve currency, but the completely dominant trade and savings currency, he is witnessing the next chapter unfold, to be based on the 'decline and fall' of a dominant currency, as trade and capital flows move gradually to the Euro.

At best, the $ will simply share the throne on the foreign exchanges with the Euro, at worst, we will see an all-out trade battle, as the two wrestle for total dominance. In the limiting of Chinese textiles to the U.S. and the tariffs on steel, the first stones have been thrown in this war.

We now look at why these events must surely happen!

The Challenge from the Euro!

The rise of the Euro as an alternative, as a more valuable and better performing alternative global currency, is becoming possibly the most pernicious factor threatening to destabilises the $'s role in the global monetary system.

Accompanying this process and signalling the steady destabilisation of the monetary system, gold is beginning to provide a 'safe haven' from the coming storms. Of course, the $ will keep a major position in the monetary system, but its reduction in importance will, as it occurs, rupture the monetary system. The demands on the U.S. Administration to get its house in order will be reflected in the fall in value of the $, eventually forcing on an unwilling U.S., an economic discipline that it has not had to obey for the last forty years, plus. It will have to match the value the Euro offers, in time. But does it have the ability to "get its house in order" or is it too late?

No doubt reactive, not curative, actions by the U.S., will be taken eventually [after the elections?] on the trade front, as well through attempts to prevent the change in the direction of money flows. But the crises will be of huge proportions, that for the sake of holding onto what remains of stability, these actions will have to be draconian measures, imposed by the U.S. on the foreign exchanges and trade. These will be such that each of us will feel their impact in our every day lives. Areas such as - interest rates - individual currency crises - trade wars and protectionism will be the first to express the pressure, as we are now beginning to see.

In addition with further swings to the Euro, the temptation to exert controls over capital leaving the $, may prove irresistible. Measures like the "Dollar Premium" the U.K. imposed in the early 1970's to protect itself from capital outflows, spring to mind.

In the early 1970's the oil price became a focal point for individuals, as it leapt from $8 a barrel to $35. The history of oil then, describes the sort of ruptures lying just ahead of us. Indeed, with the oil price around $28 a barrel currently and a cut in oil production of 900,000 barrels a day by O.P.E.C. having taken place on the 1st of November, the beginnings of an oil crisis and the flexing of oil producers muscles, has begun. As no impact has yet been felt, O.P.E.C. must be thinking of more cuts. Will we see a price rising to $50+ a barrel in the future? No sign yet but many are thinking about it.

Mr Putin acknowledged that Russia was exploring the change to Euros, whilst German Officials reported that Chancellor Schroder secured an agreement for the change in oil pricing. Such a changes will bring to the fore a power bloc that would be strong enough to resist any but the boldest and strongest measures from the States. The European bloc combined with Russia, would, by offering a better value currency, call the U.S. $ to account.

Should such moves take place, not only will U.S. influence on oil money flows wane, but its ability to control global capital will take a hefty blow. And gold in this picture? It has to be a long term positive influence on the gold price, greater than all other gold price influences put together. Its close attendance on the Euro's price verifies this. The other factors causing a rising gold price will precede and act in concert with monetary facets until a crescendo is reached, probably with gold entering a $ four figure level.

Only a restoration of confidence in the $ will precipitate a falling gold price. If this occurred, the threat from the Euro would diminish and the gold price resume its falling trend. The inherent weaknesses of the Euro would then return to the fore and a return to the $ would follow. Likely? Not so!

How can we be so certain that this will be the future, not in the long term but in, at most, the medium term. The Federal Reserve Chairman himself, Sir Alan Greenspan, has described this to us, graphically. He used history to demonstrate that his theory has worked in the past and will work in the future. It is his theories that leave us in no doubt that the demise of $ dominance is a certainty.

In the final section of this article we describe these and demonstrate just why this certainty exists. This will be presented in our publication Gold-Authentic Money to Subscribers. To obtain it, please subscribe online, mentioning this article and it will be sent to you.


Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.

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