Goldman Sachs: US dollar reserve currency status at risk

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Christopher Attard

Jul 31 . 6 min read

Hi everyone,

The dollar’s world reserve currency status is increasingly coming under pressure as gold, silver and bitcoin surge, with Goldman Sachs now questioning the greenback’s longevity. Similar sentiment was echoed by billionaire investor, Ray Dalio, known for his “cash is trash” stance on pretty much all fiat-currencies. Meanwhile, bitcoin balance on exchanges remains stable, suggesting a low investor appetite in selling at these levels.

Indeed, as the bitcoin narrative gains momentum, the antecedents to its inevitability are bubbling under the surface. Now, let’s talk about it.

The US dollar’s reign as the global reserve currency is coming under threat according to Goldman Sachs, who has finally admitted what the rest of us already knew.

Indeed, the greenback faces several systemic risks, including the US Federal Reserve’s possible shift towards an “inflationary bias,” a rise in political uncertainty and increasing concerns around another spike in virus infections, according to Goldman strategists. To add the cherry on the cake, they also added that the debt buildup as a result of the pandemic and subsequent lockdown might lead to rampant currency debasement.

Here’s an excerpt from Goldman’s commodities Research team:

Gold’s recent record-breaking rally highlights the increasing concern over the world economy. As such, the bank raised its 2-month forecast for gold to $2300 per ounce from $2000. This would about to compare with the value of $1930 when counting for inflationary effects.

Effectively, Goldman Sachs has formalised the obvious. It need not be said that a breakout above new all-time highs is typically followed by further moves to the upside (i.e., newer all-time highs), hence the fresh gold price-target from Goldman.

Meanwhile, the US-Dollar Index is crashing as the US national debt exceeds 80% of the country’s gross domestic product, boosting the risk of accelerated inflation due to “normalized economic activity.”

Goldman strategists continued:

“The resulting expanded balance sheets and vast money creation spurs debasement fears.” This creates “a greater likelihood that at some time in the future after economic activity has normalized, there will be incentives for central banks and governments to allow inflation to drift higher to reduce the accumulated debt burden.”

The Fed is expected to deliver its latest decision later today (Wednesday). The bank sees US real interest rates continuing to drift lower, boosting gold further.

Billionaire investor Ray Dalio has warned that conflict between the US and China could slip into a “capital war” which would adversely affect the dollar.

Speaking on Fox’s Sunday Morning Futures, Dalio said:

“There’s a trade war, there’s a technology war, there’s a geopolitical war and there could be a capital war — that’s the reality.”

He said:

“If you say by law, don’t invest in China or even possibly withholding the payment of bonds that the United States owes payment on in China, these things are possibilities and they have big implications, such as for the value of the dollar because premarket investors are not used to having those things dictated by the government.”

Dalio finished off with an eerie tone:

“If we don’t work together to do the sound things, to be productive, to earn more than we spend, to build the stability of our currency and build a good balance sheet, we are going to decline,” he added.

Notably, his hedge-fund laid off several dozen employees this month, suggesting that the company hasn’t been performing as well as it used to. In addition, Dalio fails to mention the adverse effect on China’s Yuan in this race to the bottom.

Perhaps it would be a good idea if Ray Dalio and Paul Tudor Jones sat in a room together to discuss hard assets, virtual or otherwise moving forward.

As it happens, a recent Glassnode media tweet has revealed that despite the $2,000 bitcoin move, there haven’t been large-scale deposits of funds into exchanges. In fact, even though there was a slight uptick, around 14.5% of the circulating supply has found its way to exchanges, showing relative stability.

Bitcoin breaks fundamental market structure — stalls just above $11,000

As it surged through $10,000 to $11,000, bitcoin broke fundamental market structure which had told a story of consolidation. Now, the story has shifted to the bullish case as bitcoin enters into the next cycle that will take it to new all-time highs.

Make no mistake, this is the move bitcoin bulls have been waiting for which will dictate price action for years to come, even if bitcoin tests older levels.

Since the breakout, bitcoin has stalled at $11,000 as it consolidates the initial move above the $10,500 area. Since this was a breakout move, probabilities are skewed towards continuation, with the next target to take out being about $14,000 (2019 high).

However, several caveats might mean that bitcoin could test prior levels sooner rather than later — the first one being the CME gap at $9,600 mentioned in Monday’s mailout, and the second being a possible rally in the US dollar.

Having said that, bitcoin’s correlation with the stock market seems to have subsided considerably with this move, as it begins to mimic precious metals and stores of value. This makes sense as it means that market participants are overcoming risk-on associations with bitcoin and seeing it more for what it is — a hedge against unlimited US Dollars and a store of value.

Since the macro-trend is starting to play out, there is little reason to get too technical here as bitcoin could rally in its thousands at any moment, provided the global macroeconomic situation doesn’t suddenly resolve itself overnight.

Speaking of overnight resolution, it’s good to note that bitcoin has barely retraced since claiming a fresh 2020 high at $11,000 — lending strength to the bulls. All in all, the probability for continuation is high, with the next level of resistance being 2019 high.

Since this is the start of a long-term bull market, I would expect retracements to be short-lived as momentum snowballs.

1-hour (LTF) lower time frame signals bullish continuation

By the time you read this, the 1-hour chart might be irrelevant.

However, just for the sake of mentioning it, bitcoin’s 1-hour chart is showing a clear continuation pattern. This means that lower and higher time-frames are telling a similar story.

Needless to say, this is not financial advice and nothing is guaranteed. However, it’s safe to say that sound money management precautions should be taken by anyone dabbling in bitcoin (and especially altcoins).

May your gains be high and your losses low.

Catch you next time.

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