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(Kitco News) - Reports of the U.S. dollar’s death are overblown, but gold investors need to look at the precious metal in other currencies, according to Adam Button, chief currency analyst and managing editor at forexlive.com.
“We are seeing a concerted effort among other countries to move away from the dollar,” Button said. “But what you see is just how dominant it is and how there is really a lack of alternatives.”
Button told Kitco News reporter Ernest Hoffman that he believes talk of a U.S. dollar decline and the rise of a new BRICS currency is very premature.
“There is a bit of a cottage industry in calling for the death of the dollar, and it's sprung up again in the last few weeks,” he said. “I think a lot of people are trying to front-run that, anticipating that weakness coming.”
Button also believes the U.S. dollar index is an outdated tool for understanding the true strength of the greenback. “It's a little bit of an antiquated instrument, although popular,” he said. “It predates the Euro, and when the Euro came together, that led to a huge weighting for the Euro in the U.S. dollar index, far more than what trade is saying. A lot of what the dollar Index just tells you is how the dollar is doing against the Euro.”
Button said there are plenty of reasons to believe that the dollar is much weaker than it looks, but currency markets are comparative, and everything else is doing even worse.
“What's happened in Europe has been equally bad to the U.S., massive fiscal deficits, a war on the doorstep of Europe, and really no solutions to productivity problems and competitiveness problems,” he said. “If you're against the dollar in the currency market, you have to be for something else, and you're picking amongst really some tough choices in Europe and Asia.”
Button said markets tend to be overly focused on the U.S. domestic economy, but because much of the world’s borrowing is done in dollars, the strength and weakness of the greenback can have an outsized impact on emerging economies.
“When you have a period of strong dollar and you have a domestic currency, particularly in an emerging market, where you have a falling value of that currency, the money you have to pay back in local terms just becomes unbearable,” he said. “So as you get the falling dollar, it helps terms of trade a lot, and the financial flows in emerging markets, which is going to add more global demand. You get this virtual virtuous cycle when you have a falling dollar and stronger global currencies, but that depends on having stronger global growth. I think once we start to cut interest rates, that is going to unfold.”
Button said that much of the money that could fuel growth is sitting on the sidelines waiting for a recessionary discount. “Right now, so many market participants are saying, ‘I'm waiting for the recession, either to buy gold or to buy stocks, I just want to see things fall 10 or 20 or 30%.’ But coming out the other side of that is going to be a much better, long-lasting trade.”
Button also believes investors in gold and other commodities have a pricing problem if they’re only looking in USD terms.
“I think there's a lot of reasons to be looking at gold in other currencies and it's probably not talked about enough,” he said. “If you've held gold in Yen terms or Euro terms or Sterling terms in the last number of years you've done very, very well. It has preserved your purchasing power.”
“If you look at what has been the best asset to own in terms of my own currency, or moves that I could have made, then you start to see a bit of a different story unfold in a lot of these assets.”
Button also pointed out that the prevailing wisdom on trading with the Federal Reserve was proven wrong last year, and it has implications for the Fed’s potential pivot.
“The old expression is ‘don't fight the Fed,’ and we've all heard that,” he said. “But the trade last year was to fight the Fed, and it worked very well, as they said they weren't going to hike rates, then they had to hike rates a whole bunch to get inflation under control. Once there is that pain, the pressure on the Fed just becomes enormous if it looks like a recession.”
To hear Button’s views on Bitcoin and his outlook on Japan and China, watch the above video.
