Table of Contents
Estimated reading time: 10 minutes
Gold, Silver and NZ Dollar Exchange Rates: A Reader Question
With the New Zealand dollar jumping sharply over the past couple of weeks (up over 4%), here’s a question you might also have been pondering. 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? Let’s look at our readers 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.”
It’s true that the NZ dollar has been strong versus the US dollar over the past almost 18 months. As shown in the chart below. Although this took place after a sharp fall.
However on a longer term basis, you could argue that the NZ dollar has really just been in a large sideways trading range.
Our reader may be right – that the NZD will continue to strengthen against the USD. Although the giant sideways range depicted above shows that instead perhaps we just see shorter terms movements up and down inside a larger sideways pattern. this might not be such a sure thing.
However, regardless of how the NZ dollar performs against the US Dollar, the key consideration is…
What Does the NZ Dollar Do Versus Gold (and Silver)?
Lately (for the last 3 or 4 months), 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 8 years. Albeit with a few periods of significant volatility. Most notably the correction from August 2020 until March of this year.
We can also see some periods where NZD gold traded in a smallish sideways range for many months or even more than a year (2018), before the next strong move up. This is somewhat similar to the sideways consolidation we have seen lately.
Here’s the key point to reflect on though. This “rise” in gold over the past 8 years in NZD (actually it would be more correct to say this fall in the purchasing power of the NZD), has actually occurred while for a good part of the move, the general trend of the NZD versus the USD has also been up. See the chart below.
So the takeaway is simply 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 may have only started its currency printing / Q.E. last year. And while it may have ended it earlier than many others. 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 for many many years.
New Zealand Has Downside Risks Still
That said New Zealand’s position is not totally rosy either.
NZ government debt may not be as bad as many other countries. But we are not without risks. From Page 14 of the RBNZ May 2021 Financial Stability Report:
“The sustainability of asset prices is a key financial stability concern for New Zealand.
The levels of many global asset prices, and the pace of their recent ascent, have called the sustainability of valuations into question. Low compensation for risk indicates that market participants may not be fully internalising risks. Prices of risky assets are therefore vulnerable to either a rise in perceived risks or an increase in risk aversion. More broadly, asset valuations are vulnerable to a rise in discount rates reflected in long-term yields, which have already crept up but could do so more sharply if inflationary expectations rise further. A disorderly unwinding of current monetary stimulus or backstops could see abrupt adjustments in asset prices, posing a particular risk to those who have purchased at the current elevated levels.”
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. Then again more recently, when the NZD/USD cross rate fell sharply at the outset of the corona-panic in March 2020. Perhaps another way to put this is, are we in fact just less weak, rather than being stronger than other currencies?
On top of this is the big question, what is the exit strategy from the government’s current lock down and elimination approach? This surely cannot go on forever? New Zealand may have gloated while the rest of the world suffered over the past 18 months. However it now seems the rest of the world is at least attempting to get back to some semblance of normality. Whereas our strategy seems to rest totally on a mass vaccination campaign to “save us”. This while results in the likes of highly vaccinated Israel, are showing that the promised 95% efficacy is a long way from reality.
Whatever your opinion may be, it seems obvious that the New Zealand economy has more hardship to endure. Whether that is due to a series of ongoing lock downs and re-starts (and therefore more business failures). Or borders which remain closed much much longer than other countries.
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. This could happen by either the continuing slow and steady approach of devaluing currencies, or as our reader mentions, 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. See: Why New Zealand Won’t Have Any Say in a Global Currency Reset
Now’s let’s look at out readers comment, “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. For more on this see: How Would Hyperinflation in the USA Affect New Zealand?
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:
Has the creation of even more debt and more currency printing in response to the Corona shutdowns, improved the global financial system? Has this resolved any of the existing problems?
Do real interest rates deliver a positive return?
No. (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)
So 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.
Editors note: This article was originally posted 3 July 2012. Fully rewritten with new charts 7 September 2021.