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In the World's Broken Monetary System, the Dollar Continues to Crack


Gold is the only monetary unit of refuge.


Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

Minyan Lauren writes:

Professor Lewis,

What do you think the message is from your Buzz yesterday? Gold has held up very well in the face of dollar weakness. The dollar has rallied despite gold holding up.

The message (in part) is that both the US economy bulls and the dollar-deflation crowd are wrong.

The US economy bulls believe the dollar index's rally since December is signaling dollar strength because the US economy is roaring and the Fed will soon be raising rates. Nothing could be further from the truth. The US economy is one of the weakest on the planet, and as we were just reminded yesterday, the Fed won't be raising rates in our lifetimes.

Meanwhile, the dollar deflation crowd thinks the dollar index's rally over the same period is signaling some sort of 2008-like repeat of that mass liquidation panic, which is also wrong. One needs to merely look at the nearly across-the-board meltup in all asset prices over the same period, which appears to be more a flight from fiat money in general rather than any flight into zero-yielding dollar pieces of paper.

In truth, the "dollar" hasn't been strong over the past few months. Rather, the euro has merely been weak, and because the euro makes up nearly 60% of the dollar index, that index has risen since December.

Thus, the rise in this index gave the appearance of dollar strength, even as other major currencies like the CAD and AUD have melted up against the dollar during the same period. Gold has been rallying in dollars since February despite the rise in the dollar index and has made new all-time highs in euros and pounds during the same period.

Click to enlarge

As soon as the market temporarily relaxes about the PIGS for a while (as it appears to be doing now), the negative focus of the forex market will return to the dollar, and the dollar index will resume its downward path simply because the euro strengthens for a while.

Click to enlarge

At the end of the day, all of these pieces of confetti have their own flaws and weaknesses, which is why they're all depreciating against gold, but the point is that nothing has changed with respect to the dollar-based monetary system being broken. People shouldn't be deluded into believing otherwise.

Thus, the real message is the same as it has been since late 2007, and that message is that the fiat dollar-based monetary system that has been the world's de facto monetary system since 1980 is completely and utterly broken. And given that the system was based on the dollar, it has the most to lose as the system continues to come unraveled simply because it was the top dog and the basis for all the other pretty colored pieces of paper (see the "Triffin dilemma").

At the end of the day, there is only one monetary unit of refuge when a monetary system implodes like this, and that is gold, just as it was when the last monetary system imploded in the 1970s (i.e. Bretton Woods). What followed was nearly a decade of currency chaos until the fiat US dollar emerged supreme, but during that currency chaos all paper currencies (including the dollar) collapsed against gold, just as they are once again today.

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