The architect of the quantitative-easing and zero-interest-rate policies that helped send gold to all-time nominal highs in 2011 is now all but calling a top in the U.S. dollar, the primary strength of which has been a major headwind for the yellow metal in recent years.
Much of the appreciation in the dollar may have already happened we may not see much more, former Federal Reserve Chairman Ben Bernanke told a financial conference in Hong Kong on Tuesday.
Any further strength in the greenback depends on the pace of the Feds rate-hiking cycle, which it launched in December. And the odds of the central bank moving very quickly are diminishing daily as uncertainty over Chinas slowdown, the collapse in oil prices, and even recessionary winds in the U.S. continue to build and drag financial markets into bearish turf.
Zero chance of new rate hike: The robust dollar has helped hinder the U.S. manufacturing sector by making exports more expensive for foreign buyers. According to Bloomberg, the Feds trade-weighted gauge of the greenback rose to its highest level since 2002 on Jan. 15. But despite the Fed having announced a target of four rate hikes in all this year, financial markets are suggesting a zero chance of another increase at the banks Jan. 26-27 meeting and just a 31% probability of one at the March meeting.
The potential for an eventual decline in the dollar is one reason why Barrons Rountable member Stephanie Pomboy likes gold. The dollar is wildly overowned, said the MacroMavens president. I think there is zero chance that the Fed continues to raise rates this year, and as those expectations come out of the market, that will work to the detriment of the dollar and to the benefit of gold.
Dollars erosion plain to see: According to Pomboy, the dollar is only as strong as other currencies are weak. When you look at the dollar versus the euro and the yen, the dollar is clearly the cleanest dirty shirt, she said. But in the meantime if you look at a chart of purchasing power of the dollar since the day the Federal Reserve was instituted, its a straight line down. So there is no question that there is a debasement of the currency. The purchasing power is being eroded. The problem is that waters are muddied by the fact that weve got so much other competition in this debasement race from other currencies.
As for stocks, she is bearish on them for numerous reasons, primarily the removal of outright Fed stimulus programs such as quantitative easing. She claims to have no U.S. equity positions except for one sector: gold. She owns mining stocks and ETFs, the major gold ETF, and even bullion. She added: I view gold as becoming a currency rather than a commodity.
Fund kingpin predicts QE4: And while Pomboy is predicting that the Fed will merely keep rates on hold, the manager of the largest hedge fund in the world, Ray Dalio of Bridgewater Associates, sees a fourth round of QE possibly on the way. Summarizing his recent appearance on CNBC from Davos, Switzerland, Zero Hedge wrote: Dalio reiterated his contention that the Fed will ultimately be forced into QE4 and that the much ballyhooed tightening cycle will essentially amount to a one-off, just to show you we could do it, blip on the ZIRP radar screen. Every country in the world needs easier monetary policy.
With Pomboy and Dalio leery of fiat currencies in the long term and even the former Fed chairman suggesting that the dollar is running out of steam, now is the time to prepare for a potentially stunning policy reversal from the central bank by investing in gold, silver, and rare coins.