The long term view

Spot gold, US $, monthly, 2002 to 2012

Here is one of the bigger themes that you have to be aware of when investing in the markets today: dollar debasement. In other words, the weakening US currency and its impact on investible assets. The chart above shows both the US dollar (red line) and gold (black line) over the past ten years. The dollar has dropped almost 26% during that period, even while gold has sharply appreciated, up some 462%. The US Government has the necessary tools to strengthen the dollar but instead they choose to weaken – debase – the US currency for many reasons, one of which is doing so renders US exports cheaper. So weak US dollar leads to increased American exports, what’s not to like? Market convention is to price most commodities in US dollars, so we see soaring food prices for one amidst a backdrop of almost all commodity prices rising across the past decade.

Undeterred by this precipitous drop in the value of the US dollar, The Federal Reserve is now engaged in another bout of Quantitative Easing, this time to infinity and beyond, since there is no stated upper limit to this program of debt purchasing which weakens the American currency. Some people don’t think this deliberate weakening will end well, and in fact may lead to chaos in the global financial system, and a price of gold approaching $10,000 an ounce amidst a return to currencies backed by precious metals. Bring it on.

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