Back to the Gold standard?

By Marius-Cristian Frunza
Weekly Briefs

Markets are currently betting against cryptocurrencies for more or less valid reasons. While the world may not be ready yet for a decentralised currency, leading fiat currencies are at a crossroads. It is easier for an atheist to trust in God than it is for an investor to trust the US dollar. Trust means value, and generally speaking, value needs to be backed by an element of reality. Can we envisage a dollar backed by gold?

Throughout history, from Trajan's Dacian Wars to California’s 1849 frenzy, gold was the ultimate store of value. Following the unforeseen public spending for the Vietnam war, the Nixon administration ended in 1971 the convertibility of the US dollar to gold.

A half-century later, the world’s leading currency is heading into the unknown. With 20 percent of all monetary supply printed since the pandemic outbreak, there are no real fundamentals to back the US dollar’s valuation. The other currencies are not in better shape. Financial institutions are playing a dangerous game, assuming that the dollar is too big to fail.

If the US dollar loses its value, there will be bigger issues in all markets. We have already heard this narrative during the credit crunch crisis.
Beyond all speculations, both investors and players in the real economy need a stable metric to evaluate the commercial and financial trades. If the current inflationary trend is not only a temporary effect, a return to the gold standard for leading currencies could be much more than an outrageous scenario.  

Gold prices exhibit a sustainable positive trend since April after a long period of silence. It could be a prevailing signal that investors are going back to basics.

The market needs to set prices, including interest rates and allocate resources. If it were up to me, we would abolish the Fed and return to the gold standard. Absent that, the Fed should be completely removed from the political sphere, its dual mandate replaced by a single mission to provide the nation with sound money. >Peter Schiff, American stockbroker and financial commentator>

Market overview

The number of jobless new claims published by the U.S. Labour department remained below 500,000, showing that the American economy is pursuing its recovery after the reopening. The projections for the GDP growth for the second quarter are above 6%, thereby boosting investors’ appetite for non-tech stocks. A higher than expected economic recovery rate is the only driver that could push the stock market north.

The sanitary situation in the UK underlines the potential of a fourth was due to the Indian variant. The mass vaccination strategy will be tested, and the outcome will constitute a make or break point for markets in the third quarter.

Focus:

Coinbase

Two weeks ago, Coinbase, the world’s leading cryptocurrencies exchange, had a triumphant listing on the stock market. Musk’s venomous tweets and Bitcoin’s abrupt disarray unravelled a shady reality for Coinbase. With many Asian countries, including China, hindering the cryptocurrencies payments, the growth prospects for the Delaware-based firm are fragile.  Since its listing, Coinbase’s share lost almost half of its initial value, and further corrections can be envisaged.

Cryptocurrencies:

Bitcoin

If we had to live our lives without Bitcoin, the pockets would all be empty. Another week passed with the leading cryptocurrency navigating into negative territory. On the one hand, this bearish trend will push out all newcomers, including leading financial institutions. On the other hand, this purge was much needed because Bitcoin attracted more sycophants than real investors. Sure, a Bitcoin trading at 35,000 USD is low but let’s not forget that it represents over five times its value from one year ago.  We had not touched rock bottom yet, and we should expect new corrections over the next week.

Focus:

10-Years US Yields

The yield of 10 years US government bonds has continuously increased over the past 12 months with a significant acceleration since December 2020. Most analysts have interpreted this take-off as a sign of inflation that will affect the American economy. Nevertheless, there could be other reasons behind this phenomenon.  A change in the demand for long-term government bonds could also have such an impact. Let’s not forget that China and Japan are amongst the critical holders of American public debt. If China decides suddenly to dump American bonds on the market, there could be significant consequences on the yields.

While the fear of inflation is real, the increase in long term yields could hide additional unforeseen consequence for the American public finances.

Commodities:

Lumber

Despite a significant contraction over the last month, Lumber prices have increased three times since May 2020. What is the reason behind the lumber rush?

This unexpected climb in lumber prices has several reasons. The origins were during the first lockdown when many of the lumber explanation facilities stopped, while the demand for houses increased. Ever since, the lumber supply has lagged behind the increase in demand. The rise in fuel prices and the workforce shortage amplified the disbalance and led to this unprecedented bubble.

Market outlook

The Dow Jones ended the week above the 34,500 mark, boosted by a certain optimism. The next weeks are crucial for the foreseeable direction of the stock market.  

As predicted, more corrections occurred in the Bitcoin market, the leading cryptocurrency crossing below the 35,000 USD.  This is not the end of the bearish cycle, and for the moment there are no signs of recovery.  

The Gold ounce ended the week into positive territory above the 1,900 mark, and we should expect a move towards 2,000 USD.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.