Gold and US dollar Still Proving Austrians right

Despite the many skeptics, the gold market keeps on making new highs (see chart below) . Earlier today, it hit US $1487 per ounce. As we have mentioned on several occasions here, this price move is exactly what Austrian theory would expect, given the unprecedented monetary stimulus that’s been applied by central banks around the world, led by the U.S. Federal Reserve, in response to the financial crisis.

US$ Price of Gold (Monthly), April 2001-present

 Source: World Gold Council

So too, the more US dollars that get printed by the Fed, the lower its value in the foreign exchange market. Accordingly, we are simultaneously witnessing a devaluation of the greenback. The demand for dollars is, of course, also a factor in establishing the greenback’s price on the currency markets. In the immediate aftermath of the financial crisis, that demand rose considerably as investors sought a haven in US treasuries. But with investors regaining their risk appetites , the decade-long downtrend in the US currency, initially set in motion by Alan Greenspan’s easing of monetary policy to deal with the popping of the dotcom bubble, has reasserted itself. As the graph below indicates, the US dollar is flirting with its 2008 all-time lows.

Trade Weighted US Dollar Index (Monthly), Apr 2001-Present

 

Source: St. Louis Fed 

Needless to say, this depreciation is also consistent with Austrian theory.  

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