The Dollar Milkshake Theory Won't Stop Bullion

Hello, friends. This is Vijay Bhambwani here and in this video, I want to talk about a very critical aspect about the markets, especially bullion and some of my friends, some of my viewers might be worried about what's happening if the US was to taper.

By taper, it is meant raising of interest rates, either slowing down or stopping, maybe even reversing the fiscal stimulus, which is buying bonds printing dollars, injecting money into the economy, and the financial markets.

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Of course the degree can vary and I have given you from the best case scenario to the worst case scenario. For example, two days ago, China introduced a ¥200 billion into its economy. So that is inflationary. But what if the US was to taper, which means roll back the fiscal stimulus, scale back the bond buying, and raise interest rates?

Will gold and silver witness some amount of profit taking? Will actually start to see even a decline? These are primed worries in the minds of my viewers and I'm basically trying to address them in this video as best as I can.

You see now, a substantial portion of the US dollars floating in the global financial markets were printed after the covid based lockdowns were introduced. So that the central banks are printing money in many countries is a given.

This is something that we realised has a gained in momentum after the World Trade Centre 9/11 attacks, and after 2008 global financial crisis, central banks in the world around the world realised that you could simply print your way out of trouble and of course there would be some kind of inflation, but you could stimulate the financial markets.

Now, there was also a theory which is called the Dollar Milkshake Theory. Now this theory states that the US can actually print unbanked dollars whenever the economy weakens and when the economy strengthens, you could basically sip back the dollars just like you sip a milkshake or a thick shake with a straw.

So those excess supply of dollars can be withdrawn during the stable times and then interest rates could be raised. Bond buying could be either slowed down or maybe even stopped, which is what is known as tapering.

So a lot of viewers have asked me, can the Dollar Milkshake Theory coming to effect? If dollars are withdrawn from the market, they would strengthen the US dollar and therefore decline in gold and silver prices, with some amount of decline coming in even in industrial metals and/or energy prices as well.

Now these are pretty valid concerns and I want to answer these in 360 degree worldview, kind of a fashion that you so know me for.

Now, let's take a look at how much was the US dollar's share in the global economy as a reserve currency. By reserve currency, I mean a currency that almost everybody uses to settle and pay for their bills.

Now, at the turn of the century in the year 2000, the US dollar's share of the global financial markets, global economic markets was 71%, approximately 71% in the year 2000. As of September ending 2021, which is approximately 21 years later, it now rests at 59.2%.

So there's been, a steep decline, a step decline of almost 12% of the share that the US dollar had in the global economy and in these 21 years, the global economy has exploded. It's ballooned up. So even though the US share should have been higher, it's actually come down.

Now what are the other currencies that have taken the market share of the US dollar? After hitting a high of 28% the euro now constitutes 20% of the global markets as a reserve currency. The Chinese yuan is now at 2.6% in September 2021. The Japanese yen is approximately 5% and the British pound sterling is another approximate 5% of the global financial markets.

Now you can see that the dollar has become less of a reserve currency than it was nearly 20 years ago. If history is any teacher and I think history is an excellent teacher in financial markets, let's go back in time and see what happened when Brexit really occurred in the British scenario.

You see, the London Metal Exchange was treated as the prima donna or number one factor for determining base metal prices. So depending on the inventory left with the London Metal Exchange, which is the LME, the prices of aluminium, copper, lead, zinc, nickel, etcetera used to go up and down.

But have you noticed of late that the inventory and the LME is falling very, very rapidly but industrial metal prices are not really rising commensurately. Barely five years ago, if the drawdown in inventory that you are seeing on the LME had been seen, you'd have seen continuous upper circuits in base metal prices.

Why is that not happening? The reason is simple. Whole lot of countries are telling England look, you're not in the eurozone. You've taken a Brexit. You exited the eurozone. We don't see why we must deposit our industrial metals or peg the price of industrial metals in our country as per what the LME's inventory levels are. Which means the LME's share as a market influencer has come down just like the dollar's share as a reserve currency has come down from 71% to 59.2% in September 2021.

It still remains the primary and the largest reserve currency in the world. There's no denying that but the fact is that any decline in the US dollar or any significant appreciation in the US dollar is likely to impact the commodities a little less than what it used to in the previous year, as long as the reserve currency share keeps falling.

So the Dollar Milkshake Theory might be fine, but I don't think that bullion prices will get unduly worried in the year 2022 even if the US dollar was to rise significantly or the interest rates were to be raised aggressively. Will it slow down the rally? Will it halt the rally? Probably yes. But will it cause a crash? No, I don't think so.

The inflation, which is expected to rise, is far too aggressive, especially food inflation, to stop the juggernaut of bullion rising. So at best, I would say that the Dollar Milkshake Theory and the strength in the dollar, rising interest rates, can put a comma in the rally in gold and silver, but it will not be a full stop.

On this optimistic note for bullion investors, I say goodbye to you in this video, not before reminding you to click like on this video if you liked what you saw. Subscribe to my YouTube channel if you haven't already done so. Click on the bell icon to receive instant alerts about fresh videos being put up out here.

Good, bad or ugly, I always welcome your feedback in the comments section, and hey, let me reach out to fellow like-minded investors and traders by you referring my video to your family and friends. I thank you for your patience and staying with me my video. Till we meet again in my next, this is Vijay Bhambwani signing off for now.

I wish you have a very profitable day, my friends. Thank you. Bye.