Gold, Silver and NZ Dollar Exchange Rates: Another Reader Question
Another question/comment we had from a reader again this week was what is the point in buying bullion here in New Zealand if the NZ dollar remains strong or continues to strengthen even further?
We’ve reprinted the full comment from the reader below and then have our comments below it. As always bear in mind this is just us sharing our thoughts with the world – who knows how correct we will be. Take it into consideration but make up your own mind…
I wouldn’t mind your thoughts on a question I’m pondering.
Let us say that Fiat currencies undergo some kind of correction. I believe they will it’s just a matter of time. All the time Gold and Silver are tied to the USD my bullion value is at the mercy of exchange rates that fluctuate through market forces.
I believe the following assumptions (please correct this if I am wrong).
The USD is a bankrupt currency. Debt as a percentage of GDP is at such a level that the only way to service debt is to print more money and devalue it further. This makes no sense and will result in a correction at some stage.
The NZD is not in such a bad position. Debt is around 25 to 28% of GDP and is underpinned by a first world economy that based on food exports… A very necessary commodity for all people.
Therefore the NZD is only poised to get stronger and stronger, which when considering Gold/silver valued in USD, decreases the value of my bullion over time.
Do you concur? If not how is this devaluing USD and its connection to Gold/silver price offset. In previous GSG readings you’ve discussed Gold values at USD5000 to USD11000 as being feasible if the USD is to be fully backed by Gold. However, in the event of a collapse of the USD, hyperinflation is likely to kick in and compared to my buying currency NZD it is significantly weakened, which in turn weakens the value of my bullion assets.
Am I missing something in my thinking here? Why should I buy more bullion in NZD, if the NZD is considered a strong currency and like to remain strong or get stronger if there is a catastrophic devaluing of the USD or resetting of worldwide currency exchange in general.
Does that make sense?
NZ Dollar Strong Relative to What?
The key point to consider here is strong and weak relative to what? Looking at your comment “Therefore the NZD is only poised to get stronger and stronger, which when considering gold/silver valued in USD, decreases the value of my bullion over time.”
You may be right that the NZD will continue to strengthen against the USD. However the key consideration is: What does the NZ Dollar do versus gold (and silver)?
Lately gold has been largely heading sideways in NZD terms. But if we look at a long term view we can see that gold in NZD has risen steadily for the past 7 years albeit with a few periods of significant volatility, most notably in 2006 and 2009. We can also see a number of periods where NZD gold traded in a smallish sideways range for many months or even more than a year before the next strong move up. This is somewhat similar to what we have seen lately.
Gold in NZD has been rising steadily for the past 7 years
The key point to reflect on here is that this “rise” in gold over the past 7 years in NZD (actually it would be more correct to say this fall in the purchasing power of the NZD) has actually occurred while the general trend of the NZD versus the USD has also been up. See the chart below.
The NZD has been strengthening versus the USD but NZD gold has still “gone up”
So the takeaway is just to look at the NZD gold price over a longer period of time to see what it is doing. It’s possible for New Zealand and the NZ Dollar to do comparatively better than many other places and yet still be losing purchasing power. Which is what the gold price chart above shows has been going on over the past number of years.
Put another way, if the current trends continue then it doesn’t decrease the value of the bullion in NZD terms it just doesn’t “go up” as much as for those holding gold in the US. Or a more correct way to frame that would be that our purchasing power of the kiwi dollar has not been reduced as much as for those in the US and this is reflected by our dollar not weakening against gold as much as the US, Euro, Pound etc.
So while our reserve bank has not engaged in any QE’s, LTRO’s etc we have still experienced the effects of these programs by the largest of the world’s central banks with our purchasing power also being watered down.
NZ has downside risks still
That said New Zealand’s position is not totally rosy either.
NZ government debt is not so bad but our net debt (i.e. public and private debt) is very high. From Page 14 of the RBNZ May 2012 Financial Stability Report “This leaves New Zealand particularly vulnerable to changes in global funding market conditions.” A good deal of our funding comes from offshore. So our banks must source money from offshore to keep on trucking and so any change in interest rates or freezing of global credit markets such as in 2008 will have a potentially dramatic impact.
Another argument is that our currency is not necessarily strong because NZ is seen as being so strong – i.e. the safe haven argument. But rather it is more about foreign investors seeking more of a yield than they get in the USA and Europe. So the inflow of money looking for this drives our currency up. This was shown to be the case in 2008 when the NZ dollar plummeted in the face of global trouble and more recently too when the NZD/USD cross rate fell sharply on Euro worries. Perhaps another way to put this is we are less weak, rather than being stronger?
Likely All Fiat Currencies Will be Devalued
Our guess (and that’s all it is) is that gold will return to the monetary system in some way. For this to happen it will most likely need to be at much higher prices than it is now to back any currencies. This could happen by either the continuing slow and steady approach of devaluing currencies or as you mention through a virtual overnight reset at some point. This devaluation of fiat currencies would need to be across all currencies for the system to have balance – not just the US dollar alone. So it’s unlikely the NZ dollar would be unaffected by this either.
Looking now at your point “in the event of a collapse of the USD, hyperinflation is likely to kick in and compared to my buying currency NZD it is significantly weakened, which in turn weakens the value of my bullion assets.
If hyperinflation were to occur in the USA it’s likely that would flow on to everywhere else. The USD is the reserve currency that all others are linked to. In effect this is what we have seen over the years – all be it on a mild basis – where all currencies have weakened versus gold.
In the past when episodes of hyperinflation have occurred, there has been another currency still linked to gold for said nation to jump into, to eventually get the hyperinflated country back on its feet. This is the first time that all currencies have been backed by nothing.
Two key questions we continue to ask ourselves are:
Have any of these recent EU measures of more debt as an answer to too much debt resolved anything?
Do real interest rates deliver a positive return? (Want to know more about real interest rates? See this: Real interest rates in New Zealand: What can they tell us about when to buy gold)
And until these change we will hang on to our bullion knowing full well that history has shown us there will potentially be long periods where bullion won’t “go up” or maybe even “go down”. But we’ll continue to sit tight until the fundamentals change.