Quantitative easing must make the dollar fall and assets like gold rise, conventional wisdom has it, because the printing of all of the dollars that the Federal Reserve is using to buy Treasury bonds - the Fed's balance sheet has nearly tripled since the end of 2007 to about $2.5 trillion - should dilute the currency's value. There's just one problem with that analysis: The dollar is roughly where it was back then - actually about 3 percent higher - despite the massive expansion of the Fed's balance sheet.
OusmÃ¨ne Mandeng, head of public sector investment advisory at Ashmore Investment Management, a leading manager of emerging market debt portfolios, offers a commonsense, yet apparently uncommon, explanation for the dollar's resilience. While most investors and economists are concentrating on the ballooning number of dollars that the Fed is spreading around, he reasons, they are ignoring the other side of the ledger - the Treasury bonds that the central bank is buying and holding. "Most of that additional supply has remained on the Fed's balance sheet in the form of non-borrowed reserves," Mandeng points out in a note to investors.
His analysis is a bit wonky for the average investor; he used to work for the International Monetary Fund, where wonkiness is a basic job requirement. What it all means is that investors who have been dissing the dollar for years may be in for some disappointment.
Gold fetishists have fared much better - the metal has been hitting all-time highs - but one of their main reasons for owning it is that it's the undollar. Once it becomes clear that quantitative easing is not killing the dollar, the true believers in gold may begin to have second thoughts. The fact that gold has underperformed many other commodities for several months suggests that it's happening already.