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G20: A Gold Bull's Best Friend?


Talk of dethroning the dollar could boost yellow metal, euro.

Editor's Note: The following was posted in real time on our premium Buzz & Banter. It's being shared here for the benefit of the Minyanville community.

The consensus seems to be blowing off the G20 as a nonevent for the dollar - but then again, the consensus didn't anticipate the Fed announcing that it would begin to monetize Treasury debt a couple weeks ago either. And it was that Fed decision that brought us to where we are today.

I don't think US creditors, like China (FXI), are very happy about the Fed monetizing government debt (especially after the Premier seemed to specifically warn against such reckless action a week before the FOMC). With all the press devoted to dethroning the dollar over the past several weeks (in the wake of the Fed announcing its Quantitative Easing program), my suspicion is that China and the other BRIC nations are going to push for some sort of G20 commitment at this week's summit to explore moving towards some sort of new reserve currency scheme.

In fact, given the statements coming out of China over the past week and in the Chinese press, to not push for such a commitment at this week's G20 would be a serious "loss of face" by the government in the eyes of its own people. Likewise, as a creditor of the US, China most definitely has the leverage to push for such change even if the US resists the idea, which it most surely would.

Now, obviously we wouldn't see an overnight switch to some sort of new reserve system on Thursday, but a mere commitment from the G20 to explore such a move (or perhaps even simply heated discussions that end in disagreement, which would probably be even more bullish for gold specifically) would raise enough uncertainty about the dollar's future to weaken it against its major rivals, especially against gold.

We'll obviously know by Thursday if my expectation about this G20 is correct or not - but if it is, then I would expect the euro to begin to resume the rally that began back in early March sometime over the next couple days and for gold to begin trying to rally sometime over the next couple days also well ahead of any potential news that is leaked from the G20 Summit.

Should the ECB additionally announce its own QE program on Thursday when it meets, that would be even more bullish for the yellow metal in all these fiat currencies, but I'm not counting on the ECB to do that just yet.

One thing is hard to deny: The gold stocks (see GDX, for example) continue to trade exceptionally well in the face of the both the big bounce in the dollar off its March low and the slide in gold back to levels that preceded the Fed's QE announcement (not to mention the decline in the equity market yesterday).

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Positions in gold, gold stocks

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