Alasdair Macleod | Friday, October 20th

After the previous two-week rally, it was perhaps natural for precious metals to consolidate this week. Gold, which closed on a high note last Friday, lost $23 to $1281 by early European trade this morning (Friday), and silver 34 cents to $17.08. Trade on Comex was subdued, and the reason behind the pause appears to be a continuing rally in the dollar.

The dollarís rally extending was always likely, given its decline since the start of the year. Essentially, it is a pause which reflects traders locking in profits. And when that process is over, the dollarís downtrend is likely to resume.

There are two reasons for the dollarís continuing weakness. Offshore demand for the dollar is set to deteriorate, as China continues to chip away at its status as the dominant settlement currency. Latest moves, which will culminate in the forthcoming introduction of a yuan for oil futures contract on the Shanghai Futures Exchange, strike at the heart of the dollarís status. Indications are this contract will start trading next month, so that by the beginning of 2018 it should be reasonably established.

In time, this should mean that bank credit loaned offshore from America will contract, reflecting sales of surplus dollars. To the extent these sales are not neutralised through currency intervention by the authorities or the banks reducing their balance sheets, these surplus dollars will end up onshore, inflating domestic credit. The transfer from offshore to onshore is bound to undermine the dollarís value.