Dollar Rises as Lira Drops

Turkey is suddenly on the world’s financial radar. Concerns over the country’s economy include high debt, high inflation, and government intervention in the Turkish central bank’s operations. This all resulted in a 45% drop in the value of the Turkish lira in 2018 alone.

Amidst a declining trend, selling is accelerating faster and faster; a trend that has been ongoing since 2013. The lira is taking a quick tumble from the panic-selling event, as demonstrated below.

The amount of US dollars equal to one Turkish lira

 

Turkey’s President Recep Erdogan dismissed the weakness, claiming the drop in the lira to be an outside plot designed specifically to tarnish his regime: “What is the reason for all this storm in a teacup? There is no economic reason… This is called carrying out an operation against Turkey,” he said in a speech on Saturday.

The market does not believe him.

Concerns are arising that the large European banks will be over-exposed to Turkish debt. In essence, this is a “contagion” reaction, in which the weakness in the Turkish banking system is feared to spread and contaminate the larger European economy.

The net effect of this would be the from the euro sell off alongside the lira. On Friday alone the Euro dropped 1.2%.

No Bid for Gold… Yet

It is critical to witness the present state of the market psychology: during the Turkish and international banking distress, the market is turning to the US dollar and US bonds as safe-haven assets. Unfortunately, the market seems to be ignoring the safe-haven appeal of gold. A flow of funds can be seen from the market reaction to the euro panic selling on Friday, below:

US Dollar, US Bonds, Gold, and the Euro

An old market adage says: “When an asset fails to respond properly even when it should, then something is fundamentally weak within that market.” We cannot know why the gold market is not reacting the way it theoretically should be amidst a fiat-currency destruction in motion, but the bottom line is that it is not.

The market at this time will exchange one deteriorating fiat currency for another.

Precious Metals Thesis

In order to profit in an asset class, one must disagree with the sum of the market participants. If gold were already higher, having been bid up due to a loss of faith in fiat currencies worldwide, there would be no opportunity to eventually profit. The possibility for profit must come from a disagreement among participants in the future value of an asset class.

For now, we still perceive the dollar as a safe-haven. This will change at some point in the future. Every fiat currency in the history of humankind has eventually reached its intrinsic value, which is zero. Our central long-term thesis revolves around a global realization that no fiat currency is intrinsically safer than any other…

This is the truth as we see it fundamentally, but clearly, the market does not agree with us at this point.

Panic in the Turkish lira, a contagion weakness in the euro, a flight to safety in the US dollar, and a no-bid for gold. This is the chain of events that has accelerated over the past week.

For now, let us recognize what presently exists in front of us, for in our disagreement with the market eventually lies the opportunity for profit.

Dollar and Gold Can Move Together

Finally, we must reiterate that gold and the dollar do not always move in contrary directions. There are many occasions throughout history when both have moved in tandem, such as 1987 – 1992 (top) when both moved lower as a net sum, and during 2005 (bottom) when both moved higher together.

US Dollar and Gold being compared on a chart

US Dollar and Gold on a 2005 Chart

The dollar index is one feature which impacts precious metal prices. However, one can’t assume it’s the only or principal component which does so.


Christopher Aaron
Bullion Exchanges Market Analyst

Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency. 

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is a third party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.

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