The Dollar is Going Up

Monetary Metals's picture

Let’s take a look at a few graphs of the dollar, from Feb 1, 2013 through Friday May 17, 2013. Yes, I said graphs of the dollar. I’ve priced the dollar in gold first (of course), then silver, the euro, and even the yen. The pattern is obvious. The dollar is going up.

dollar price in gold

dollar price in silver

dollar price in euros

dollar price in yen

I did not show copper, lumber, or wheat though they show the same trend. These commodities are not money, of course.

My point is simple. It’s not gold that is going anywhere. In past articles, I’ve used the analogy of measuring a steel ruler using rubber bands. Using the dollar to measure gold is like that. In this article I show that it’s not just gold, but silver, other currencies, and commodities. The dollar is rising now matter how we measure it.

The question not to ask is: “how are they manipulating gold?” The question is: “why is the dollar rising?”

To answer that, we first have to understand why the dollar had been going down. Most would say that it’s because the Fed has been “printing” and increasing the quantity of dollars. If that is so, then why would the dollar ever rise, as it has before (e.g. in the 1980’s), and as it is doing now? The Fed cannot and does not “un-print” dollars. This stock explanation is not satisfactory.

In one word, the answer is: arbitrage.

Let’s take a step back and look at the Treasury bond. The government pays for net expenses above tax revenues by borrowing. To borrow money, the Department of the Treasury sells bonds. This is an important aspect of our current form of government, as voters have demanded far more government expenditures than they are willing or able to pay for via taxes. In this aspect, the Treasury bond is a tool of fiscal policy, or spending, and cash flow to pay for it.

There is another aspect to the Treasury bond. It is the key asset of our monetary system. It is the asset on the Fed’s balance sheet (increasingly, post 2008, there are also mortgage bonds) to back its liabilities. The liability of the Fed is the Federal Reserve Note, commonly called the dollar. The Treasury bond is also a significant backing for the liabilities of commercial banks, pension funds, annuities, and insurance funds. Finally, the Treasury bond is used as collateral to enable borrowing.

the circular dollar reference

The monetary system today is entirely based on credit, and the Treasury bond is the base of it. The peculiar characteristic, one could even say the shabby little secret, is that the Treasury bond is payable in dollars but the dollar is the liability of the Fed which is backed by the asset of the Fed which is … the Treasury bond. It’s circular and self-referential.

People often use the shorthand of saying that the Fed is “printing” dollars. It is actually borrowing them into existence and lending them. It is true that there is no actual lender. The Fed has sole discretion to create these dollars, unlike any normal bank, that must persuade a saver to deposit his capital in the bank. The Fed’s expansion of credit involves no saver. The Fed’s credit is counterfeit.[1]

The dollars appear ex nihilo at the Fed, and they use them to buy an asset, basically a bond, or to otherwise lend. Thus the Fed creates both a liability and an asset in this process. If the value of its assets should ever fall significantly, the market will not accept the Fed’s liability—the dollar—at face value. When gold owners refuse to bid on the dollar, the dollar will collapse.

Let’s get back to arbitrage. If a bank borrows money from the Fed, they will use it to buy an asset or lend it to a third party who will. This is an arbitrage. The short leg is the loan from the Fed, and the long leg is the asset purchased. As with all arbitrages, it will act as a force to pull the two values towards one another. Market price is always pulled down by the short leg, and pushed up by the long leg.

In the case of all borrowing from the Fed, the short leg is the dollar itself. I define arbitrage as the act of straddling a spread in the markets.[2] The arbitrager is often trying to profit from the interest rate spread directly, as in borrowing from the Fed at the discount rate and buying a Treasury bond that offers a higher yield.

Another strategy is to try to profit from a change in the spread, as in borrowing dollars to buy gold. In this case, if the dollar price falls, this will be a profitable trade. This is a weaker arbitrage than buying a bond, as gold does not have a yield.

As I noted above, the very act of arbitrage pulls down the price of the short leg and in the case of borrowing from the Fed the short leg is always the dollar. Whether a bank borrows dollars, to buy Euros and from there to buy Greek government bonds; whether it lends to a hedge fund to buy gold; or whether it lends to a consumer to buy a home, the dollar is pulled down. On the other side of the trade, these assets are pushed up.

This, rather than the rising quantity of dollars, explains the falling value of the dollar. And now, recently, the dollar has been rising. The logical explanation is that these trades are being unwound, either voluntarily or under duress. My definition of deflation is a forcible contraction of credit. It is not the shrinking number of dollars (if the number is even shrinking). It is the closing of innumerable positions, by the opposite arbitrage. Previously it was sell dollar / buy asset. Now it is buy dollar / sell asset.

Gold is the most liquid asset. Its bid-ask spread does not widen much when large quantities are sold on the bid or bought at the offer. In contrast, the bid in other assets can drop precipitously in times of crisis. They are hardest to liquidate precisely at the time when one must sell. In some extreme cases, the bid can be withdrawn altogether. Though the spread does not widen in gold, heavy selling does push down the bid on gold. Market makers will then pull down the offer to maintain a consistent spread.

Being the most liquid, gold is the most sensitive. It is the first asset, the “go to” asset to sell when a balance sheet is under stress. Gold therefore has the least lag in response to a change in the monetary system. Compare to real estate, where due diligence alone could take weeks or months. Additional inertia comes from how properties are valued: by looking at recent comparable deals. Real estate would not be the first asset that a bank or fund would want to sell, due to several factors including long closing time, wide bid-ask spread, and high costs to sell such as sales commissions and attorneys. In real estate, there are no market makers. The offer can remain high even with the bid plunging, as the typical holder of real estate is not willing to sell at a loss and holds out for a number that covers all costs and fees and allows an exit at a profit.

Equities are usually liquid, closer to gold than to real estate in this regard. However, for the past few years, there have been many flash crashes. In a flash crash, the bid drops to $0.01 for a brief moment, and typically at least one market sell order is filled far below the “normal” price for the stock. These flash crashes prove that there are serious problems, that there are structural cracks beneath the surface.

An important principle to keep in mind is that in times of stress or crisis, it is always the bid and never the offer that is withdrawn. While there have been a few flash smashes (an amusing term) it is not a coincidence that these are vastly outnumbered by the flash crashes. This is because stress and crisis always come with a need for liquidity to pay debts that cannot be rolled over, margin calls, or to be flexible and agile. In bad times, people prefer to own a more marketable asset compared to one that is less marketable. They especially prefer to own the asset that is the unit of account for their balance sheet.

By definition, there is no risk to holding dollars if your balance sheet is denominated in dollars, and your liabilities are in dollars. This is the reason for the so-called “flight to safety” for the “risk-off asset”. You are not making, nor losing, money when you hold dollars. On gold denominated books, holding dollars is quite risky, of course.

Going back to the falling dollar, as the interest rate falls the discount factor used for an enterprise’s future earnings also falls. The same $1 in earnings in 2023 is worth more at a discount of 3% annually vs. 6% ($0.74 vs. $0.56). The result is rising stock prices.

In addition, the “animal spirits” of John Maynard Keynes have been set loose. Most people hold the false theory about the quantity of money and its impact on the price of everything, and it is quite popular to believe that this means stock prices can only rise. Proponents of this theory should look at Japan. In any case, deprived of other means of obtaining a yield (i.e. in the bond market), they must do something. People know the dollar is falling, though they attempt to measure it by looking at the rate by which consumer prices, measured in dollars, rise. They should be looking at the rate at which the dollar, measured in gold, is falling.

Right now, everyone is on the same side of the trade: long equities. This is dangerous because when it reverses, the market may not find a bid for quite a distance down. In a normal market, it is the short sellers who make the bid. By the indications I can see, those who have attempted to short this market have capitulated by now.


In Part II (free registration required), we consider why stocks are rising in this depressed economy, and look at the abyss we are now rapidly approaching.

[1] My definition of inflation is an expansion of counterfeit credit, discussed in this paper:

[2] I define and discuss in my dissertation: A Free Market for Goods, Services, and Money

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foytik's picture

The question not to ask is: “how are they manipulating gold?” The question is: “why is the dollar rising?

Not so much. Paper GLD has dropped nearly as much with respect to the Euro and the Yen. The scale of the gold drop is so much larger than the dollars rise vs. the Euro that gold in dollars and gold in Euros charts for the past 6 months look practically the same.

semperfi's picture

So, you have all these "experts" that say the dollar is toast, the petrodollar is toast, etc, etc.  None of these experts discussed the dollar rising relative to almost all other currencies.  Maybe these "experts" are the idiots and Bernanke & company really are geniuses, and all of us who bought gold & silver to protect from the demise of the dollar are the idiots.  Why not?  This has gone on far longer than any of us imagined.  So why can't it go on far longer?  Hmmmm? 

GeezerGeek's picture

I'd love to see the dollar rise to the moon. I'd love to see the price of a new Rolls Royce at $20,000, as it was around 1962. Or a new Ferrari at $12,500.

Some see the dollar as rising. I see it as sinking less rapidly, for the moment, than other pieces of fiat.

Bastiat's picture

Very well presented but a couple of questions: why is gold the most liquid and sold first?  Why not US treasuries-as you said, the foundational collateral in the system?

Also not only the Fed but banks create thin air counterfeit money-though they have to have deposits (reserves) the reserve requirement is fractional.

tango's picture

The gold play undoubtedly has to do with huge swings.  With bonds we are taking 10-15 basis points, with gold - hundreds of dollars. PMs should ONLY be bought by those who can afford them and use them properly - as a hedge, not an investment.  I am about 10% PM with silver based $14 and gold about $1300 but I do not plan on tradingn these anytime soon. 

Bastiat's picture


I was taking issue with this statement:

"Gold is the most liquid asset. Its bid-ask spread does not widen much when large quantities are sold on the bid or bought at the offer. In contrast, the bid in other assets can drop precipitously in times of crisis. They are hardest to liquidate precisely at the time when one must sell."

I don't believe that is true at all.  The most liquid asset is T-Bills - they are also the most abundant. 

spaceduck's picture

Go usd go, go and don't look back! To the sky!!!

Stuck on Zero's picture

Not mentioned is that quantities of everything (except gold) are increasing.  That circle grows larger and larger. It's like musical chairs with 100 players and 10 chaira.  Sooner or later the music will stop.


MrBoompi's picture

I was a little amused by the comment "voters have demanded far more government expenditures than they are willing or able to pay for via taxes". This is hogwash. Most voters want a balanced budget. It's true they may disagree as to spending or taxation, but the fact remains only a few of us demand the government borrow money and the Federal Reserve system lend it. And who might these people be? Why, the very people who do get first use of the newly created funds, and the people who profit from the riskless arbitrage that accompany it. This is a cost, or hidden taxation, on the vast majority of us. There are a few reasons why wealth disparity is on the rise. This is one.

semperfi's picture

I call bullshit !!!!  Most voters want first and foremost to take care of themselves at the expense of someone else, then secondly to take care of the someone elses, ie:  1) me  2) everyone else.  Medicare recipients will vote to keep their full-blown medicare, not giving a rat's ass that it is going to bankrupt us.

tango's picture

I am sure most of the folks you associate with want a balance budget.  So do my friends.  But we are in a distinct minority.  A good 50% are utterly clueless, 25% are misinformed / believe conspiral nonsense / blame others, 20% are fuzzy and about 5% can follow the arguments and the math.  Things like "hidden taxation", "arbitrage", "Federal Reserve" mean absolutely nothing to the majority of citizens.  Even those who want a balanced budget want their SS and Medicare - the two biggest culprits in the stack. 

Mi Naem's picture

Unfortunately, I seem to keep forgetting that the "articles" posted at the top of the ZH page are frequently more like banner ads than actual featured articles.  They exist for exchanging/sharing a subscriber base with associated web sites, and any actual information shared therein is purely incidental. 

I'll have to stop reading ZH before my first cup of coffee. 

Quinvarius's picture

You dance a dangerous dance when you listen to the piper's tune.  I advise you not to do the Dollar jig.  You are looking at a manipulated currency market and then trying to explain it.  The explanation is the Dollar trades within an agreed upon range.  It is currently near the top of that range.  There are no fundamentals.  There is no market.  It is an enforced exchange rate.  The next thing that is going to happen is a rising Euro.  And it will happen for no other reason than it is near the low end of the trading range.  I can't tell where it will turn or when.  But it will go back to 1.35 when the central bankers are ready.

Bohm Squad's picture

Not to mention GBPUSD just showed up on my radar as it hit under 1.513XX's today.  Lookin' for a long entry...agree on the EUR call, too.

tango's picture

Yeah, they contacted me yesterday and said they were going to make the push to 1.35 in September after they return from their vacation on the Mother Ship.  It's amazing how folks get furious when writers simply state the facts - the dollar has risen and most likely will continue to rise.  You rarely hear the once-common mantra out here that the market is "gonna crash anytime".  I note that even as posters savage the guest writers, the Tylers closely follow the pronouncements of CNBC, Goldman, Morgan and the other movers and shakers. 

Quinvarius's picture

I'm not furious.  I am laughing at people who don't get it yet.  There is no currency market.  It is all the same thing.  The central bankers all agree on what exchange rates they are comfortable with.  Then they enforce them.  The USD has been in the same range for 8 years. 

You are never going to get a tail event in the currency markets.  That is the fact.  I am just laughing at you guys running around trading without any inside info on when the interventions will take place.  You are not in the club.  Don't even try it.

You know where the USD was in January of 2005?  84.  Just like today.  They are not going to let it rise beyone agreed upon parameters.  It is just a number on a screen that they control with derivatives and a printing press.


OneTinSoldier66's picture

"There is no currency market.  It is all the same thing."


Tango didn't get the message about the LIBOR rate crimes. Errr, wait, they call crimes by bankers "scandals" nowadays. Sorry, the LIBOR scandal.

BeetleBailey's picture

What motherfucking Obamavik cuntrag wrote this stinkburger piece of garbage?


Yo...fucker....81 billion a month out of thin air....more more more......


You may be right on the spot price...but value????



tango's picture

If you read more than ZH you'd know that many have declared the rise of the dollar in the near future all but certain.  Yes, it's partly due to the demise of other currencies but one can never discount the tremendous advantage of being a global currency  I can't get over the number of posters who choose ideology over reality.  They refuse to participate in the market explosion because "it's all fake" or "it's gonna crash real soon".  Same is true of the XF trades because "the dollar is doomed".  Shorting the dollar in the near future is suicidal. 

OneTinSoldier66's picture

Was the Stock Market crash of 1929 and ensuing 1930's depression real, or fake?


If the "market" is real then perhaps I should participate if I have the desire. But exactly how do I tell if it's real or if it's fake with Ben Bernanke counterfeiting FRN's out of thin air? Or is calling Ben Bernanke a counterfeiter just ideology?

Vooter's picture

"I can't get over the number of posters who choose ideology over reality. They refuse to participate in the market explosion because "it's all fake" or "it's gonna crash real soon"."

That's because they're not money-hungry swine who spend their lives nosing around the trough for every last fucking penny they can find...

orangegeek's picture

article missed on this:


The US Dollar Index is a weighted geometric mean (like an average) of the dollar’s value compared ONLY with six other major currencies which are:

  • Euro (EUR), 57.6% weight
  • Japanese yen (JPY) 13.6% weight
  • Pound sterling (GBP), 11.9% weight
  • Canadian dollar (CAD), 9.1% weight
  • Swedish krona (SEK), 4.2% weight and
  • Swiss franc (CHF) 3.6% weight


When these six climb, the USD falls as was the case yesterday.

El Hosel's picture

" STRONGER Dollar"?  Dollar index has been going sideways for four years.

Japan is trashing their own currrency, Fed is trashing gold, rates and short sellers, China ties their currency to the US.  Three very, very large players rigging "markets" in broad daylight. Only the SMELL is getting "stronger".

newworldguy's picture

your theory fails because you suggest the current trae is buy dollars sell assets.  But the opposite is happening.  Asset prices are going up!

Gold Eyed Cat's picture

"Previously it was sell dollar / buy asset. Now it is buy dollar / sell asset."

The author of this article is dishing out some very sound advice... if you are a crack dealer.


disabledvet's picture

great start...not too happy with the ending though. gold is very ILLIQUID (relatively speaking) as assets go. diamonds, pearls, emeralds and the like...VERY liquid. so is artwork and "art like moving pictures." obviously so is oil, natural gas, distillates. equities are HIGHLY liquid..."the best of the best" as they say"...and some debt instruments...many these days it would seem. so is just plain old cash! (yes that's an asset too) and land/office rents. "then you get to gold and silver" but that's just me. so explain this "rush to liquidity" then. who's getting SQUEEZED? who's then Next Bailout Tycoon! i absolutely agree the Bucky is SOARING in value here. perhaps it could all be summed up "the same thing happened when Japan came up with the idea of QE in the first place." hmmmm. VERY interesting. Great day Zero Hedgers. "the information source for the world."

Vooter's picture

You think diamonds and artwork are more liquid than gold? LOLOLOLOLOL...

maximin thrax's picture

You must live on a desert isle if your experience is that gemstones are more liquid than gold. I have several local coin dealers who will give me $50 below spot for gold any day, which is about 3% off spot. Sell a diamond? Maybe take a 50% hit. More likely 75% or more from Rappaport. Sell a colored gemstone for any amount? Where? And where's your gemstone report, btw, because that's the only thing that will even make a jeweler look at it? Find a professional gem dealer and you might get 10 to 20% for a good (not commercial grade) ruby, sapphire or emerald. Unless, of course, you have world-class gems (and those all-important lab papers confirming origin and no treatment) and can wait to sell at Christies auction or the like.

spanish inquisition's picture

The ship is going down and the discussion centers around the passenger in the back who is the highest aft and will hit the water last. He will be in a good position for the life saving helicoptor ladder, which would be a miracle, because all the other pilots are also on deck.

vmromk's picture

Wow, thanks for your profound analysis......I'm gonna sell all my gold and load up on dollars, since their value is going up.
Should I get low on dollars, there is no need to worry, fuckhead Bernanke will just print more.

Hey monetary metals, who the fuck would subscribe to your horseshit service ?

Are you related to Graham Summers ?

tango's picture

Many have been preaching for years that the dollar will only rise in the future.  Bass, for example, opines that the dollar will rise against most major currencies including the yen and euro.  Seventy years of history, national setups, global trading treaties and the universal acceptance of the dollar cannot be undone with hope and hype no matter how much one rants.   For the dollar to fall, it must be recognized that we are in Japan-mode, endlessly QEing, endlessly debasing, robbing Peter to pay Paul.  (Yes we are doing that but nobody sees to notice.) Don't bitch because you don't like the facts presented. 


I agree that in the short run  we are going to see the dollar rise as Japan inflates, China cools and the Euro goes through its death rattle.  PM's should continue to drop in price and avaliability (physical) so there is a window when metals will be cheaper. I have been buying for the last 5 years and while the dollar denominated value today continues to go down, I keep buying both gold and silver and will continue to until its not avalibale any longer.  One day I expect we will wake up to a Comex/LBMA default and bids without offers.  Keeping the long term in perspective allows me to watch my portfoliovalue drop while I keep stacking

Vooter's picture

"Don't bitch because you don't like the facts presented."

Why not?

disabledvet's picture

the author could care less what you do with your money. he's here to provide INSIGHT into why others..."aren't poor like you and me." (i imagine he does fine with his news letter...certainly zero hedge does. show some respect too bro.) in other words "he's putting his CEO hat on and imagining a world where other assets in fact do exist" as of course they do. "money" is the greatest asset of all. Just ask the French. "the richest King of them all" had ZERO cash.

philipat's picture

No, none of the markets are manipulated, we have totally free markets.......................

GeezerGeek's picture

Except for ammo...there we see the market equivalent of a Denial of Service attack.

GetZeeGold's picture



Heh heh....good one amigo.