Gold took another hit yesterday and lost everything it gained on Wednesday. Current prices are $1289.90 an ounce. As expected, gold has been in the balance this week ahead of US economic data, the cruncher of which will be announced later this morning.
The strength of an economy is measured on certain yardsticks, with industry being the most important. In the US manufacturing, factory activity and car sales are all heading in the right direction and although housing is sluggish there is no cause for concern.
The report that mostly effects the stock markets however, is the non-farm payroll which measures employment figures. Last month unemployment in the US was slashed to 6.6% and expectations are that will be reduced to 6.2% in March. A healthy job market means an improving economy.
The US economy is the world’s largest and therefore gives us a good indication of how strong the global market is. Despite poor data coming from China, the world’s second largest market, trader sentiment is dovish and investors are putting their confidence in equities.
Change of reserve currency
The world’s reserve currency is the US dollar, so we all have an interest in how well the greenback performs. A collapse of the dollar would prove disastrous to the world economy, and with reports that the dollar is “worthless” and “weak,” it might be time for a change – which is exactly what a survey of 200 institutional investors believe.
The Chinese Yuan, otherwise known as the renminbi is expected to be the alternative. The influence and growth of economic power in China means the redback is the second most widely used currency in trade finance and with the Central Bank of China buying huge quantities of gold reserves, the country seems to be preparing for this inevitability.
There is also speculation that the People’s Bank of China is preparing to expand its global trade which would take the Republic one step closer to liberalizing what is currently a tightly controlled currency. But ultimately, China will have to loosen its financial policies before the Yuan will be flexible enough determine global interest rates and relax restrictions on flow capital.
Collapse of the dollar
Participants of the survey believe the transition from greenback to redback will happen within the next ten years with the majority of reforms being introduced within the next five. Some commentators have speculated reforms have already begun, citing the recent weakening of the Yuan is to shake out speculators.
The United States of course will not want to simply hand over the world’s reserve currency to their closest rivals. Before any transformation will take place, the dollar will have to collapse – which seems inevitable given the depth of debt the senate are under.
Whilst the world banks play around with the global economy, there will inevitably be a lengthy period of financial hardship for the rest of us. It is therefore a savvy investment to put faith in precious metals and buy gold and silver whilst prices are low.