One year ago we showed the following chart to explain the relative strong dollar that was on everyone’s mind at the time. With a second leg higher in the US dollar imminent, this particular chart will be more important than ever. Claims to dollars, such as demand and time deposits, or even more opaque money-like products created by the shadow banking system is just that, a claim or derivative on the final mean of payment, namely base money. When trust breaks down and owners of dollar claims rush to exchange them for actual dollars, the price of dollars goes up in relation to goods and services because there are not enough dollars to satisfy all the claims outstanding. In monetary terms deflation takes hold and there are no market mechanism that can clear this anomaly (because it was never a proper market to begin with) as the price of the underlying and the derivative will move in perfect proportion to each other. In enter the Federal Reserve with their QE programs, id est base money creation, to meet dollar demand and stem the ensuing panic.
Unfortunately, something even more sinister has been going on with dollar derivatives internationally. In addition to domestic claims to dollars, there are a massive market for dollars internationally called Eurodollars.
gold has corrected, but may fall a tad further, either way this is a dip that should be bought.
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