The Dollar Crash

August 7th, 2011

The US Dollar, the first pure fiat world reserve currency, has lost almost all of its value against gold, falling from $1 to around $1680 per ounce.

Its now looking increasingly likely that the record-high price of $1680 on June 8 represented the peak of a financial fraud that is now slowly unravelling. The interesting question is: where will the price decline stop?

Most assets have a fundamental value: the value that reflects the practical use to which that asset can be put. You can always live in a house regardless of what happens to the real estate market, so we can be confident that house prices wont fall to zero. Similarly, if the price of gold fell too much, people could always use it to make jewelry, so gold is a relatively safe investment.

The puzzling thing about the US Dollar, is that the currency doesnt seem to have any fundamental value at all. True, you can currently purchase many goods and services with Dollars. But despite the volume of Dollar-denominated commerce being high, Dollar-denominated prices seem to be driven up by the current rounds of quantitative easing (money printing).

The US Dollar is different from traditional currencies. The fact that there are 300 million Americans who use dollars for their day-to-day transactions creates a floor for the value of dollars. Most of us dont pay much attention to the exchange rate between dollars and other currencies, because were used to thinking of dollars as our fundamental unit of value. And even if we wanted to stop using dollars, it would be hard to do since most of the people around us wont take anything else. So, despite a major screw-up by the Federal Reserve, we can still count on the value of dollars not falling very much. This logic of course, will also apply to the new pure digital currency ‘Bitcoin’.

In contrast, theres no significant community of people who conduct commerce exclusively (or even primarily) in Gold. And you cant eat, live in, or make a fire out of Gold. And this means theres no logical stopping point to Golds price increase. So far Gold enthusiasts have been buying Gold as the price increases, convinced that the price will go up eventually. But as the hoped-for Dollar rally has failed to materialize, more have gotten discouraged or bored and cash out the Dollar, pushing the price of Gold up further. This process has been going on for a couple of months, and now it appears to be accelerating. I suspect the Dollar is terminal.

http://blogs.forbes.com/timothylee/2011/08/07/the-bitcoin-crash/

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