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Dennis Gartman on CNBC earlier in the week said this would be the most boring FOMC statement from the Federal Reserve this year. He was correct.

The Fed released a status quo policy announcement on Wednesday that was a stark difference from the fireworks created by their prior September statement and press conference. The Fed opted to keep their asset purchases via Quantitative Easing unchanged at $85 billion a month to be split between US Treasuries and Mortgage Backed Securities. The new consensus for the inevitable Fed taper has been pushed back to March of 2014, and with that the price of gold did a triple top at 1,360 USD per ounce, and then headed lower to finish the week, as the metals market once again looks to be under pressure.

Jon Hilsenrath, economics editor for the Wall Street Journal best summed up the uncertainty about when we will see the Fed begin to taper; “it’s anyone’s best guess.” And this relates to understanding how the US central bank operates and makes their decision. Every policy announcement or statement, and thus change in policy direction is decided upon by quantifying the most recent economic data. So as Hilsenrath explains, predicting when the Fed will taper is the equivalent to forecasting GDP, because without knowing how the economy will perform, it’s impossible to set a timeline for the Fed’s decision-making process. Furthermore, with the manufactured uncertainty and headwinds to economic growth created by the US government in Q4 of 2013, forecasts become even less reliable.

What we have seen in the markets though, in reaction to the US Federal Reserve and the announcement of continued easy money policies, is similar to what we are witnessing in the overall economy, and that is that they seem directionless. When 2012 seemed like a mediocre year for economic growth, and analysts were looking for the pickup in 2013—that too did not exactly come to fruition. Instead, what prevailed was more of the same tepid growth levels restrained by uncertainty relating to central bank and government policy.

Without trying to forecast GDP, it seems inevitable the Fed will begin to taper asset purchases sometime in 2014, which is encompassed in the price of gold. And there are two strong supporting pieces of evidence for why this taper will come. Firstly, each US Treasury auction in the second half of this year has seen the Treasury department cut the number of bonds they are issuing to the market. Second, sequester budget cuts, and then constrained budget negotiations going into the New Year force austerity measures on US government spending. With a diminished supply of Treasuries going to market, nor the same level required to finance their deficit, the Feds involvement in the market thus becomes limited. Without the supply of newly issued government debt, the Fed does not, and will not need to be as an active of player.

Looking at the price of gold then heading into the New Year keeps with the short term bearish outlook. The problems with the US government debt aside, gold has become out of favour; therefore, excess selling in the market will keep downward pressure on prices. Moreover, even as the market is in search of a bottom, there is still reason to see higher prices in the years ahead. The US government’s inability to control their debt load is what keeps the long-term outlook bullish. We can look for strong economic growth to allow the issuer of the world’s reserve currency to manage their debt load, but likely it will be inflationary policy which attempts to keep their debt intact, and that ultimately will drive the price of gold to new record high prices.

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The Triffin Dilemma, named after economist Robert Triffin, speaks to the balancing act required on the part of the government that stands behind the world’s reserve currency. On the one hand, foreign nations wish to hold the reserve currency either to conduct international transactions, or as diversification for their foreign exchange reserves to ensure stability in their exchange rate vis-à-vis their price level. This requires the issuer of the reserve currency to run trade deficits as their currency must be in surplus. In the case of the United States reserve status, there must be excess dollars in the world in order for other countries to hold their currency. Thus, nations that hold the US dollar look to the issuer for stability. The dilemma for the States, however, is that any short term policy or shocks can have long term implications on the currency’s value. This is especially true if the shocks are manufactured by their government.

The Triffin Dilemma was specifically used to explain the role of the United States during the period of Bretton Woods. The world operated on a gold exchange standard, as 35 US dollars was fixed to an ounce of gold. Eventually, continuously expanding fiscal policy in the United States caused investors’ perceptions to devalue the US dollar relative to an ounce of gold. This resulted in countries, led by France, to call on the US to redeem their dollars for gold. Ultimately, the Bretton Woods regime collapsed. In 1971 the price of an ounce of gold again began to float against the dollar. Similarities though, from the Triffin Dilemma can be drawn to the international monetary regime we are in today.

The US dollar is still by and large the world’s reserve currency, and there’s no escaping it. About 85% of international transactions are done in US dollars, and of the world’s central banks 62.2% of their Foreign Exchange Reserves are US dollars verses the second most held currency, the Euro, which accounts for 23.7% of reserves. What this has meant for the US though, is that this demand for US dollars and US debt created by their currency’s reserve status has allowed them to borrow at relatively cheaper levels, and this also doesn’t account for the US Federal Reserve’s easy money policies supressing what would be a natural level for interest rates. Moreover, it becomes clear that events in Washington over these last few weeks illustrate how US policy makers abuse the privilege of the role of the US Treasury in international financial markets.

There is no question, and never was a question surrounding whether or not the US was going to default on their debt. The idea of a manufactured default orchestrated by the President and Congress’s inability to negotiate a deal to raise the debt ceiling, however, is what led investors to interpret the situation like it were probable. The discussion itself though was enough to damage the credibility of the US dollar. Large institutions like Fidelity and JPMorgan sold near dated Treasury’s as the idea of the US going past the debt ceiling deadline was not worth flirting with.

No other currency can handle the inflows of capital like the US dollar. There is no alternative. However, investors more than ever require that hedge to their US dollar assets. We saw an IMF report last week that showed the Canadian dollar, after a long time in the making, is now the fifth widest held Forex Reserve, and it’s not just because of our strong commodity export sector. There’s also an increasing demand for reserve assets uncorrelated with, or negatively correlated with the US dollar. Policy makers today exemplify the importance of diversifying away from or hedging against the US dollar.

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The renowned commodities investor Donald Coxe wrote in the Globe and Mail this week on what seems to be an original and profound thesis for gold. Where many have witnessed for years gold’s role as hedge or safe haven during times of economic turmoil and financial instability, it may play a positive role in good economic times as well. From the data alone, academic research can illustrate gold’s role as a safe haven since the price floated in 1971. It is an asset that exhibits close to zero correlation with US equity markets, which means there is no relation in price movements. And Don Coxe does not refute that in gold’s price history. Instead, in what seems to be a welcomed idea for gold investors, it’s that instead of waiting for fear to grip financial markets once again, imagine a world in which gold can rally in a positive economic environment.

Ideas like this are novel and welcomed. I think it is unfortunate that the idea of believing in gold is associated with fear mongering and awaiting an eventual economic collapse, especially during a period of repeated new highs in equity markets. And as some analysts seem to be forecasting, this bull market in equities very much remains intact, and with that comes a recovering strength to the global economy. If Europe is able to move past their triple dip recession, they potentially have the most to gain. Being a group of economies that have stalled out for so long, and are in the process of applying needed structural changes, could pave the way for opportunity in productivity and manufacturing gains. The other key driver for Europe, which relates to a story without the United States, is that they are on aggregate the biggest importer of goods and services from China. This provides the elements for a rebounding global economy with resurging growth from emerging markets as well.

In the US we are witnessing a renewed growth in the oil and gas sector. With that, States linked to extraction and refining stand to benefit. This sector has acted as the catalyst for economic growth in the United States; furthermore, it’s truly surprising that the Obama administration is taking this long to make a decision Keystone XL pipeline. Wavering around the issue of coal production when it’s a far greater polluter than the tar sands crude, illustrates how political this issue has become, and exemplifies that this is a decision without thought to sound economic policy. Without moving too far from the point though, what is evident from what we see in the US right now is that they may lead the globe out of the financial crises that roiled the world markets 5 years ago, but their position as the world economic leader will not be sustained.

Resurging economic growth, however, will lead to the inevitable rise in interest rates. The US Fed will be first, but other central banks will quickly follow. This is central to Coxe’s thesis. Central banks will be forced to act to contain short term inflationary threats and increasing rates of nominal economic growth. In doing so liquidity, the very fuel to the fire that helped stock markets soar out of the 2008 downturn, will begin to dry up. Rising interest rates make the cost of borrowing more expensive and see tighter credit conditions for borrowers. As we see less liquidity in the capital markets, funds will have to go elsewhere. And perhaps, gold becomes that attractive opportunity for an inflow of capital, but perhaps it is also that insurance against decreasing liquidity.

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These last few weeks have acted as a nice reminder that the fundamentals of the gold trade can span beyond the idea of Quantitative Easing and the US Federal Reserve. Ultimately, it was a fear trade that brought an influx of fresh buyers to the gold market since its most recent bottom in June of this year, and thus propelled gold higher surrounding 1,400 US per ounce. Of course investors saw those gains quickly pared back as political gaffes from a defeated US administration allowed investors to see that the dissipating threat of military action on Syria would not jeopardize positions in riskier assets like equities. But without taking a myopic or short term view of the metal, the action in gold reminded us of the role gold plays as a hedge or safe harbour from geopolitical instability.

It purely was the lack of direction and organization of the United States Executive Branch that created a shift in the markets this past week. The inability of the representative of the President of the United States on foreign soil, Secretary of State John Kerry, to deliver a satisfactory press conference by conveying his President’s agenda shifted the US to the passenger seat in terms of negotiations with the Russian’s. It also illustrated to investors that this would become a mundane process with little influence on financial markets as the United States diplomatic ability not only lacks conviction, yet also follow through.

Now the bigger question for gold investors and also potential gold investors is: when is there going to be an appropriate entry point for this market?

It seems this market has quickly shifted past this idea of a “war premium” or increased demand stemmed from geopolitical uncertainty. Moreover, if gold’s role is to act as that hedge when investors lose faith in risk assets and look for a safe harbour, the goal would be to already holding a fraction of your portfolio in physical metal. Investors may position themselves in the metal, but ultimately those holdings would be for a long term hedge in lieu seeking a profitable short term trade. Thus, the focus of gold from short to medium term horizon (12 to 18 months) shifts back to the taper debate at the US Federal Reserve.

As the Fed begins their two day policy meeting in Washington next Tuesday, it has long been the anticipation of investors that the Fed will commence tapering asset purchases. Personally, I would like to think that this effect was priced into the market when it collapsed back in the second quarter of this year, but more bearish forecasts arise as Goldman Sachs commodity’s research chief said Friday he could see the metal dipping below 1,000 US per ounce as the Fed reveals there tapering schedule. UBS AG’s Wealth Management commodities research head echoed that message as an advanced taper could ultimately provide a shock to the market. But the message from the investment banks is a signal that the mainstream perspective for gold’s outlook is sideways to negative. Nonetheless, this relates back to gold’s ultimate role as a hedge.

A hedge is an asset that is negatively correlated or uncorrelated with another asset. An example of this is gold and the US dollar; US dollar strength is often associated with weakness in the gold market and vice versa. Stanley Druckenmiller, George Soros’s point man for his infamous Quantum Fund, which brought down the British pound, appeared on Bloomberg recently. According to Druckenmiller, “QE has subsidized all asset prices, and when you end that, all prices will go down.”

Gold will act as that hedge, even if it does not go up in value, it will hold its value amidst market turmoil elsewhere. It has throughout history, and it will continue to.

The date was August 9^th, 1974 when Richard Nixon resigned the Office of the President of the United States. Some people today might take the opportunity to argue over how Nixon abused the powers of the Oval Office, or how the Supreme Court began a judicial process in which they investigated the executive branch of United States government. The significance of this was this was the first time the high court went after a president, and many questioned whether the action was overreaching their mandate. However, since we are on the topic of Nixon (and because the lack of action in the markets last week very much exhibits the doldrums of summer) it is also important to discuss his role, during his presidency, in ending a gold exchange standard (known as Bretton Woods) and the transition to this current period of floating exchange rate regimes.

Towards the end World War II, the United States and other participating nations established a monetary regime known as a gold exchange standard. Different from a gold standard where an individual country’s currency or fraction of their currency is backed to their own gold reserves, a gold exchange standard had member nations exchange rates pegged to the US dollar, and the US dollar in turn was partially backed by gold. This began the US dollars reign as the world’s reserve currency as every other countries currency was relative to the US dollar. And from the setup of the regime, the idea was that US dollars were as good as gold, and vice versa.

Particularly in the postwar period, stability in exchange rates was pivotal to a period of sustained and stable economic growth in order to avoid a repeat of events following the First World War. During that period, countries had individual control over their exchange rates, which led to competitive devaluations and erection of trade barriers in order to direct domestic demand for home grown (or provided) goods (and services). David Ricardo’s 1817 On the Principles of Political Economy and Taxation written around a century earlier would reveal why this was a bad idea.

Amongst the many flaws surrounding the system of international finance during Bretton Woods, one key example was that pegged exchange rates were more suitable during times of slow and steady economic growth. As the world’s economies began to pick up speed, the gold exchange standard came into question. The US needed to continuously run deficits in order to ensure liquidity in global finance; however, US deficits undermined the value of their dollar relative to the price of gold. This was known as Triffin’s Dilemma, named after the economist Robert Triffin.

In addition to this, the US overburdened themselves with heavy social spending, and the expense of the Vietnam War. The Treasury was in desperate need of more money, which led to congress decreasing the fraction of gold backed to a US dollar. It’s no question this continued to shake the confidence of participants of this global monetary system, and thus led to French President, Charles de Gaulle along with others to begin calling on the US to exchange the dollars held in their foreign exchange reserves for gold.

It was Nixon’s executive order to close the gold window in 1971 as faith in the Bretton Woods Regime had dissipated. Ultimately, the perception of the US dollar being overvalued collapsed the link between the dollar and gold. And so begins the paradigm of the dollar and gold’s inverse relationship. Some forty-two years later, the result of a preponderance of fiat currency gives gold the standing of being a store of value rather than cash.