Thinkpad: Dollar, Gold And Crypto

Happy Sunday. Hope you are perched in your favorite corner with a cup of coffee as you read this.

This was a week when you may have wanted to save a newspaper front-page or two just to remind yourself that this actually happened.

The US economy shrank 32.9% in the April-June quarter on an annualised basis, data this week showed. It was the sharpest contraction the economy has seen since the 1940s. In Europe, Spain saw a GDP contraction of 18%; France of 13.8%; Germany of 10.1%. The Euro area overall contracted 12.1%. Many others will see similar once-in-a-lifetime contractions reported over the next few weeks and months and this complication of charts gives you a graphically stark picture of what is happening around the world.

All this was expected, you say? Yes. But don’t let the ‘expected’ take away from the seriousness of what’s going on across the world. People are losing jobs, corporations are losing business, governments are losing revenue and central banks...well...they are the only game in town.

Against this backdrop, when the U.S. Federal Reserve met this week, it stuck to the ‘whatever-it-takes’, ‘as-long-as-it-takes’ script.

The consequence of all this is playing out in the dollar and gold markets. As the printing presses roll on, the U.S. dollar is getting decimated. It suffered its worst week in a decade. In contrast, gold (and its +1 silver) continue to be on a tear as a hedge against uncertainty and dollar depreciation.

So much so that the ‘dollar’s reserve currency status is under threat’ calls are back! This time from Goldman Sachs. Read that argument here and tell us if you agree. Or is your reaction more in-line with former U.S. treasury economist David Beckworth, who, in response to these calls, simply tweeted... “Yawn”.

Back home, the Indian central bank has kept a tight leash on the rupee and is continuing to add to its reserve stockpile. Suspect it is avoiding a sudden-surge-followed-by-sudden-stop kinda crisis. Fair enough.

Gold imports into India are already down and typically volumes slide in high-price scenarios due to notoriously price-sensitive Indian consumers. So we aren’t seeing any gold import-driven crisis this time. What we are seeing is a surge in borrowings against gold. Time to keep a watch on that?

Unrelated to the global scenario but related to gold, Bloomberg reported this week that the government is in the early stages of considering a gold amnesty scheme. Really? Do we really want to go down this rabbit hole again? Remember demonetisation...

Anyways, moving back to the global picture and ending on a ‘crypto’ note.

Notice what’s been happening in the crypto universe lately? No, I don’t mean the surging prices of Bitcoin, although there is that too. What I am referring to is the subtle shift in how payment giants are looking at crypto. Last week, Visa announced a roadmap to incorporate cryptocurrency payments into its network. Earlier this month, Mastercard also expanded its crypto program. This article from Forbes sums it up well.

Not at all suggesting that anyone rushes into crypto – and here in India, its regulatory status remains nebulous. But we should watch global developments. In their first coming, cryptocurrencies were reduced to speculative assets. Their volatility meant they were inefficient as ‘mediums of exchange’, the core characteristic of a currency.

Could that change? Someday, somewhere...

Till next week.