It's a Good Time to Invest in U.S. Dollar

There has been some confusion among those interested in the U.S. monetary policy and why the U.S. dollar has remained strong even as the Federal Reserve created enormous amounts of money out of thin air. Under normal conditions that would have put downward pressure on the value of the greenback.

Since economics are no longer operating under normal conditions, neither will the usual performance of the U.S. dollar; and it hasn't.

When the Federal Reserve launched its money-creation spree, it changed the currency and economic dynamic around the world, as other central banks were forced to enter a currency war if their particular economy relied heavily on exports.

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Asian Currencies and the Export Wars

There are a number of reason Asian currencies have been falling recently, with the most obvious being expectations the Federal Reserve will raise interest rates in the latter part of 2015.

Other factors attributed to weaker Asian currencies include pressure from local businesses, demand for electronics gadgets fell, MERS, funds pulling money from emerging markets, Japanese yen, and a potential Greek default. I'll break down how these are having an effect country-by-country in a moment.

What's important is with the backdrop of rising interest rates in the U.S., Asia has several other factors to look at to get a view of the macro and micro elements causing the drop in currency value.

Combined they represent a trend that is likely to continue, unless the Federal Reserve surprises most and decides to hold off on raising interest rates.

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Some Strategies for Cashless Economy

I've been somewhat surprised at the relatively low level of resistance to the proclivity of governments and the banking system to move rapidly toward a cashless society.

When looking through comment sections of blogs and news sites, one of the major responses to the concerns is people from the U.S. will allude to the words on our currency that says it's a "legal tender," as if that will stop the forward motion of what has become a global initiative in many nations.

Immediately below is a list of the reasons I have been able to find as to why we should move towards a cashless society. They are from a variety of nations, and not all are given as reasons from any one country.
Stated reasons:

    Fight terrorism

    Tax evasion

    Black market

    Costs of currency production

    Improve credit rating of country (Uruguay)

    Encourages underground economy

    Money laundering

    Reductions in armed robbery

    Counterfeiting


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13 States May Use Gold, Silver as Currency

A growing number of people are looking for an alternative to the failing U.S. dollar, and that has prompted a number of lawmakers to push for their respective states to allow gold and silver coins to be used as legal tender.

While the U.S. Constitution forbids the printing of paper money or the establishment of a currency by individual states, it does allow for the use of gold and silver coins for use as money, based upon the value of the content of the precious metal. Essentially it's not the creation of currency, but using the content of the metal as a means of exchange.

Utah, which has already approved of the idea, is experimenting with a system which will likely be close to what most states that approve the measure will adopt. The Utah Gold & Silver Depository, order that people won't have to carry around gold and silver coins in their pockets, will produce a system which will link the gold and silver coins they own with a debit card held by the owner of the metal coins. Once the spend money from the debit card, they will then have it removed from their accounts, just like regular currency would be.

Since the accounts would be based upon the value of the content of the coins, that means they would fluctuate in value on a daily basis, and even throughout the day, depending upon how the accounts are set up.

This is a good idea for an alternative currency, but my thought is most people that understand what this is, if they were to allow gold and silver-based accounts, would probably hold it rather than spend it as they would regular money.

Others that may not understand the implications and reasoning behind alternative currencies that are valued by the silver and gold content inherent in them, may choose to use the accounts as a checking account, rather than a store of value.

Either way, offering options currency options is a great way to allow people to choose for themselves the direction they want to go with their money.

More than likely a lot more states will embrace gold and silver coins as currency as more get on board with the idea, and demand grows for it in light of a U.S. dollar that continues to lose its value.

US Dollar Index Clobbered on Leaked ECB Plan

The U.S. dollar and U.S. Dollar Index are getting hit hard today after the "leak" of the plan by the ECB to acquire an unlimited number of bond which mature in 0-3 years.

Ignorant reporters continue to imply there is uncertainty because Germany opposes the plan, but over and over again that has been the positioning of Chancellor Angela Merkel, who attempts to make it look like she's fighting it till the bitter end before caving at the last moment. There is no doubt this plan will go forward officially on Thursday.

This will probably appear to stabilize Europe over the short- to mid-term, but that's not even a guarantee in the contracting economy of the euro zone. It would be more accurate to say that is what will happen in the minds of the people of the world, even though absolutely nothing is being done to address the underlying issues, which is primarily the reduction of government spending and changing of financially parasitic lifestyles of the people living in socialist Europe.

Until that is done, nothing will be changed which will have a beneficially long term effect.

As for the U.S. dollar, it was trading down against the euro, with the euro climbing to 1.2603 against the greenback, a gain of 0.0036 as of 12:16 EST. The U.S. Dollar Index was down to 81.21.

Time to Buy Australian Dollar?

It may be a very good time to invest in the Australian dollar, as it's coming off a recent low and has rebounded in a way that looks very sustainable.

The last time the Aussie dollar came off a low in the latter part of 2008, it almost doubled in value.

Another reason to invest in the Australian dollar at this time is it's out of favor at this time, which means it hasn't participated in a huge run up as happens once traders take notice of a currency moving up in value. At that time all you're doing is chasing the price. Better to get in before the crowd discovers it.

Added together, the price of the Aussie dollar is inexpensive, starting to sustainably trend upwards, and is still out of favor with traders and investors.

Since the currency is still hated, and the upwards trend solidly in place, it's the perfect time to get into the currency.

As for the Aussie dollar itself, it pays out 3.7 percent interest at this time, the leader among of all the major currencies.

One of the best ways to play the Australian dollar is via the CurrencyShares Australia Dollar Trust (FXA). It pays out a monthly dividend valued at 3.7 percent.

U.S. Dollar Rallies on Nothing

The US Dollar Index jumped 30 points right after the release of the minutes of the last FOMC meeting, based upon nothing but the confirmation of what had already been communicated by the FOMC after its latest meeting.

Apparently the market was looking for something that was said in the meeting regarding the implementing of more stimulus measures, even though it has already been stated that in the near term it's not likely to happen, although the Federal Reserve stands ready if the economy continues to weaken.

That also suggests investors believe the economy is approaching that point, and are looking for some clue as to when quantitative easing will resume.

There is no doubt there will be a QE3, it's just a matter of when, not if. But leery investors are wanting a more definitive statement and time frame than is currently being offered by the FOMC.

At the meeting the Federal Reserve announced interesting rates would remain at 0.25 percent into 2014, and that Operation Twist would be extended. Investors were hoping for more, but didn't get it, and apparently were hoping to find clues in the minutes that would suggest more is in the wings.

But I'm not sure what more can be said than it stands ready to do what it needs if the economy doesn't recover.

It appears investors and the Fed have two different views as to the health of the economy, with some investors thinking it's past time for more intervention, even though it has done nothing to help in the past.

More than likely the consequence of all of this will be for investors to remain skittish and on the sidelines until hints toward further stimulus are offered, or until true economic growth returns.

That's good news - at least temporarily - for the strength of the U.S. dollar.

Jim Rogers on U.S. Dollar

Talking to Steve Forbes at Forbes.com, Jim Rogers weighed in on the U.S. dollar and why he's holding it at this time, as well as why he might even acquire more of the greenback sometime soon.

It's interesting to listen to Jim Rogers chat up the U.S. dollar, as over the long term he has called it a "flawed" currency in the past, and continues to believe that to be the case.

Even so, he is invested in the dollar, and has been since around early 2011.

When asked if the reasoning behind investing in the U.S. dollar was because it's in a "bear market rally?," Rogers said this:

It’s a bear market rally, yes, in my view. Although when I walk out of here, I may buy more. No, I don’t see it as anything more than a bear market rally. But I own several currencies around the world. There may be a time ... in the foreseeable future, when all of us are going to be getting rid of our paper money, because it’s being debased all over the world. One reason I own the dollar is because everybody’s panicked about the debasement of these other currencies. Paper money is suspect.

Also being an expert on gold, Rogers knows we're in a gold correction at this time, and expects it to drop more before recovering to continue its upward price run.

That means for a season the U.S. dollar will continue to flourish, as it has little in the way of competitors in the short term, making it the preferred place of safety for investors, as the euro continues to plunge in value based upon the sovereign debt crisis in Europe.

Yield for Dollar, Yen Could Push Dollar Lower

Several factors are currently in play concerning the dollar, yen yield, which could push the U.S. dollar down in the short term.

With a wider spread the Japanese will invest in the U.S. dollar, while a shrinking spread causes them to place their money elsewhere.

On Thursday, March 1, the spread between U.S. and Japanese note yields (yen against the dollar) hit 0.29 percentage point, the widest it has been since August 2011.

The risk for the dollar, yen correlation is the low yields in the U.S., which are expected to remain in place for some time, combined with a possible upswing in the economy of Japan.

That combination, could, in the short term, cause the yield spread to shrink.

U.S. Dollar Trades Mixed Against Major Currencies

A day after Ben Bernanke helped bolster the strength of the U.S. dollar by not mentioning any more plans for quantitative easing, the greenback fell back to earth, trading mixed against other major currencies.

Most of the important economic news centered on unemployment, which in the United States remained level, dropping only slightly, while unemployment in the Euro zone climbed to its highest level since the introduction of the Euro as a currency in 1999.

Of the 17 countries using the Euro as currency, unemployment plunged to 10.7 percent for January, pushing it down against the dollar to $1.3316 in the latter part of the trading day.

The British pound climbed against the U.S. dollar from $1.5925 to $1.5953.

Other currencies strengthening against the dollar were the yen and the Canadian dollar. The dollar fell from 81.18 yen to 81.08, and from 98.89 Canadian cents to 98.57 Canadian cents.

Against the Swiss franc the U.S. dollar climbed from 0.9039 to 0.9059.

Jim Rogers Sees More Currency Turmoil

In an interview with CNBC today, billionaire commodity bull and expert Jim Rogers said he sees continual turmoil in the currency markets, although in the short term he has positions in U.S. dollars, renminbi and euros.

This is the result of the horrendous decisions of the Federal Reserve and other central banks around the world to continue to "stimulate" the economy with money created out of thin air, which is extremely disruptive to the market over time.

Rogers says he sees the renminbi possibly tripling over the next ten to twenty years. He said, "I own the renminbi. Every time I can, I buy more renminbi. I expect the renminbi to double or triple in the next decade or two." He did say he doesn't have a position in the British pound at this time. Rogers added he owns no U.S. stocks either.

As for his positions in gold, silver and other precious metals, Rogers continues to say he won't be selling any of those. "The way to protect yourself at a time like that, historically anyway, has been to own real assets. Those are my longs, and currencies," said Rogers.

Rogers recommends for investors to monitor the currencies of the world. When quantitative easy results in increasing currency turmoil, he says that's the time to buy commodities.

He concludes that as the near the latter part of this decade it's doubtful very many investors will hold paper money, as it's increasingly falling out of favor as debasement pushes the value down.

Time to Start Saving Nickels?

Word has been circulating for some time that the cost of making pennies and nickels in the United States has risen to the point where it costs over double the value of each coin to make.

For the penny, it costs 2.4 cents to make, and for the nickel, it costs approximately 11.2 cents to make, as of 2011. Both of those numbers include labor and materials.

As for the nickel, the metals used to make them - 25 percent nickel and 75 percent copper, costs at this time about 6 cents a coin, with expectations that will rise as commodity prices continue to rise.

The reason why the government is looking to change the metal mix now is the cost of making them will rise as the Federal Reserve continues to print money and the Obama administration and Congress refuse to cut back on spending.

That of course means the price of copper and nickel will jump, as will the value of nickels.

Like the silver in coins being dropped in 1964, it could be an important part of a portfolio to include nickels.

At this point in time we aren't allowed to melt them down to get the metals from them, but there will be plenty of coin dealers in the future ready to acquire the nickels as they go up in value because of the rising value of copper and nickel.

Places to acquire larger numbers of nickels, are from banks, vending machine owners, and casinos. With casinos you'll have to act like a gambler looking to put some serious coin in the nickel slots.

For the bank, keep in mind you'll probably be charged a premium if you ask for too many at a time, as they are charged for each roll they sell you. Buy a lot at a time and they'll pass those costs onto you.

U.S. Dollar Drops Against Euro Again

The euro extended gains against the U.S. dollar on Friday after euro zone leaders came to an agreement on a competitiveness pact.

The euro hit $1.39 EUR=, up 0.8 percent on the day, according to Reuters data. Short covering played a major role in strengthening the euro zone single currency throughout the majority of the session, according to strategists.

The euro zone leaders reached a deal to establish higher retirement ages, more flexible labor markets and debt and deficit limits for euro zone countries.

The deal is expected to be officially adopted at a full 27-nation European Union summit on March 24-25.

U.S. Dollar to Continue to Fall in Value

The U.S. dollar is likely to fall in the week ahead as investors continue to bet that interest rates in the euro zone will rise ahead of those in the world's largest economy.

U.S. February jobs data came in a touch better than expected on Friday but disappointed investors who had hoped for an even stronger report. For details see

Investors see strong U.S. jobs growth as necessary for the Federal Reserve to end its second round of quantitative easing and instead tighten monetary policy by raising rates.

The U.S. situation is in sharp contrast with that of the euro zone, where the zone's common currency is likely to remain supported after European Central Bank President Jean-Claude Trichet strongly hinted at an interest rate rise in April, bolstering the view the ECB will tighten monetary policy before the Fed.

"We had Trichet warning Thursday that the ECB is considering a rate hike and perhaps the start of a rate hike cycle," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey. "The U.S. job number came in as expected and provided little direction to the market other than it did not disappoint and that will support risk appetite."




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Euro Rises Against Greenback on Interest Rate Differentials

The dollar fell broadly Thursday as traders opted for the safety of the Swiss franc and Japan's yen amid ongoing turmoil in the Middle East and North Africa.

Meanwhile, expectations for widening interest-rate differentials pushed the euro to a three-week high against the dollar.

The dollar sank to a record low against the franc of CHF0.9234 as violence increased in Libya and fears increased that unrest in the Middle East could spread to more oil-producing nations like Iran and Saudi Arabia.

"We continue to focus on the issues in the Middle East," said Aroop Chatterjee, chief foreign exchange quantitative strategist at Barclays Capital in New York. "Even though we've seen a bit of stabilization in oil prices, in the currencies market, [investors] still favor safe havens."

The franc has become the most popular safe-haven option during times of geopolitical risk. It also rallied against the euro Thursday. The yen also was bid higher against the dollar and euro thanks to its perceived safety.

Oil prices climbed above $100 a barrel early in the global day on the New York Mercantile Exchange, leading to the dollar's record weakness against the franc. But even as oil prices have backed off that lofty level, currency investors continued to favor safety.

The situation in the Middle East appears to be far from stabilizing, so the flight to safety is likely to continue, analysts said.





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Yen Nears 3-Week High, Franc Climbs to Record on Libyan Unrest

The yen was about 0.4 percent from the strongest level in three weeks against the dollar and the Swiss franc climbed to a record as an uprising in Libya sent oil to a 29-month high, boosting demand for safer assets.

The yen and the franc headed for weekly gains against most of their major counterparts as stocks and commodities dropped worldwide. The dollar traded within 0.2 percent of a three-week low against the euro before a report forecast to show U.S. pending home sales declined in January.

“It’s a new scenario where the market is battling as global economic growth is being thwarted by higher oil prices, and that’s being reflected immediately in the U.S. dollar,” said Kurt Magnus, executive director of currency sales at Nomura Holdings Inc. in Sydney. “The Swiss franc and yen will continue to do well, they are incredibly safe-haven currencies.”

The yen was at 81.93 per dollar as of 8:10 a.m. in Tokyo from 81.89 in New York yesterday, when it touched 81.63, the strongest since Feb. 4. It has gained 1.5 percent this week against the dollar. The franc climbed to a record 92.28 centimes per dollar before trading at 92.55 from 92.64 yesterday.




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US Dollar Wavers on Surging Oil Prices, Weakens Against Swiss Franc

The dollar nursed heavy losses early in Asia on Friday, hovering above a record low versus the Swiss franc as investors sought safety in other currencies on fears the unrest in Libya will spread to other oil producers.

But a sharp retreat in oil prices from 2-1/2 year highs, sparked by an unsubstantiated rumour Mummar Gaddafi had been shot and Saudi Arabia's assurances it can counter Libyan supply disruption, could offer the dollar a brief respite.

"That safe-haven trade of going long Swiss may just turn around a little bit," a trader at a U.S. investment bank said.

Higher oil prices are seen as having a bigger impact on the U.S. economy given it's reliance on consumer spending to drive growth.

The dollar last traded at 0.9250 Swiss francs , having hit an all-time low of 0.9234 francs on trading platform EBS overnight. It has fallen nearly 4.8 percent against the franc in the last two weeks, its worst showing since June.




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US Dollar No Longer Safe Haven?

The US dollar has traditionally been a safe-haven asset, meaning whenever people are afraid, they sell ‘risky’ assets and flee to the safety of the US dollar. The same goes for US Treasuries.

Indeed, at the height of the global financial crisis (right after Lehman Brother’s bankruptcy in September 2008), both the US dollar and Treasuries surged. The Chicago Board Options Exchange Market Volatility Index (VIX) also spiked at that time. In uncertain times, the VIX is probably the purest measure of the market’s fear because it tracks expectations of volatility in US stocks.

Meanwhile, risky assets – those most susceptible to an economic downturn, like industrial commodities, junk bonds, small-cap stocks – plunged.

In the period after the zenith of this panic, the value of the US dollar, US Treasuries, and the VIX continued to strongly correlate with the resurgence of fear and uncertainty in the global financial markets.

However, starting the week of February 21, 2011, this pattern appears to have broken down.






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The US Dollar Ready to Collapse?

The turmoil across North Africa and the Middle East is threatening not only to overthrow aging dictatorships, autocracies and monarchies, but also to upset the geopolitical balance between the countries of that region and the Western powers that has existed since at least the 1950s. For the West, the issue has always been the security of oil. For the US there is a second issue, and that is the security of Israel. Now both are under threat.

Some 56 per cent of the world’s oil reserves are in the Middle East, with another nine per cent in Africa. Therefore, unrest in the region could be the catalyst that sets off a global monetary-oil shock. The unrest in Libya has sparked a sharp rise in oil price. Libya holds the world’s ninth-largest reserves and is the twelfth-largest exporter, providing about two per cent of the world’s daily oil supply. Not large and it is possible that Saudi Arabia could pick up the slack but it sends out a wave of uncertainty and it is unknown where the next outburst might occur.

Saudi Arabia is the world’s second largest producer, behind Russia. Saudi Arabia exports roughly 75 per cent of its production. If the unrest spreads to Saudi Arabia then all bets might be off the table as to how high oil prices can go.

Saudi Arabia is governed by an absolute monarchy which rules by decree. While its people are generally well-off, it has a minority Shia Muslim population (about 20 per cent), largely employed in the oil-producing regions, who are at the margins of the society. Saudi Arabia has a poor human rights record and its Wabbabi brand of Sunni Muslim religion has often been noted to be behind alleged terrorist organizations. Unemployment is high at just under 11 per cent, although that is better than most Arab countries.

The US is the world’s largest consumer of oil, at roughly 19 million barrels per day. It imports almost 10 million barrels per day. China is now the second-largest consumer. Among the top 15 consumers we also find Japan, Germany, France, Canada, Italy and the UK. Yet outside of Canada and China (which, like the US, produces roughly half of its daily consumption and is also the world’s third-largest producer), none of the others are in the top 15 for production. And amongst the Western economies, only Norway and Canada are listed in the world’s top 15 exporters.

It has often been said the US dollar is a petrodollar. That is to say, it is earned through the sale of oil. Oil-producing countries such as Saudi Arabia and Venezuela, which peg their currencies (within a band) to the US dollar, are as result quite dependent on the value of the US dollar. These countries and many others earn large amounts of US dollars because of their oil production.

The US dollar is also the world’s reserve currency. All commodities are priced in dollars – not just oil. It is the most marketed currency in the world and it is owned more widely than any other currency. One would therefore believe that a strong dollar is not only in the interest of the United States, but everyone else as well.

But the US dollar is also a fiat currency. A fiat currency has value only because the government says so. The Latin word fiat translates as “let it be done”. Thus, the value of money is dictated by government decree.

Today, all national currencies are fiat currencies. The trend began in August 1971 when President Richard Nixon took the US dollar off the gold standard thus also taking the world off of the gold standard. Increasingly from then on, money was whatever a government said it was. As such it has no real value except being declared legal tender.

Fiat currencies have a long history, mostly of failure .The Romans didn’t have paper money but they developed an early form of fiat by constantly decreasing the amount of silver used in the denarius, their main medium of exchange. They continued this debasement until the coinage became intrinsically almost worthless.

The Chinese were the first to issue paper currency in around the tenth century but eventually they printed so much that hyperinflation occurred and their currency became worthless, even though its usage lasted close to 400 years.

History is respite with the failure of fiat currencies. The most recent example was collapse of the Zimbabwean dollar, and a famous example was the Weimar Republic of Germany in the 1920s.

Fiat currencies have a history of ending in hyperinflation – if a country starts printing money excessively, it is often on the road to ruin and hyperinflation. And this is the United States today. The US has unparalleled deficits and debt; it has increasing expansion of its money supply, using a fiat currency; and it is being misleading about its true economic situation through its published economic statistics.

But it also has the world’s reserve currency, and international trade is carried out in US dollars. Any country buying oil, for example, must first convert its currency into dollars to pay for it. The selling country receives those dollars, which are often recycled right back into purchasing US debt, so that the selling country does not adversely impact its own currency.

But the US dollar is a declining currency. In the last 100 years it has lost over 96 per cent of its purchasing power (this process accelerated after 1971).

Many items, including Social Security payments, are tied to the reported rate of inflation. With a much higher rate of inflation, many items would have increased in price faster and the US Treasury would have had to pay out far higher entitlements.

The recalculation of the inflation numbers were provided by www.shadowstats.com. That chart suggests that the US dollar has lost over 98 per cent of its purchasing power over the past 100 years.

Many would say that it doesn’t matter, that society today is far better off than it was 100 years ago. And it is, and more appear to be joining the middle class. But technological advances have changed society in a dramatic way from 100 years ago. That and lots of money provided by a rapidly expanding money supply and debt all courtesy of a fiat currency. With nothing tangible to back money, money intrinsically has no value – except what the government says it is.

But with the explosion in debt and money and the decline in the purchasing power of the US dollar, society has become more divided. Income and wealth is increasingly concentrated in fewer and fewer hands. During the financial crisis of 2008 the bailouts went to the financial institutions (and corporations) that were either indirectly involved or directly involved as the cause of the crisis. The taxpayer (public) footed the bill.

Meanwhile the housing market collapsed with tens of thousands (millions?) losing their homes to foreclosure and tens of thousands lost their jobs. General wages have been stagnant for at least the past two decades and those living on fixed incomes (pensions) have seen a constant decline in their living standards. Meanwhile, those involved in the creation of money particularly at the banks and investment management companies have seen an explosion in their wealth and pay packages.

The unemployment rate soared and while the headline unemployment rate (U3) in the US is at 9 per cent, the Bureau of Labour Statistics U6 number is closer to 17 per cent and www.shadowstats.com have calculated that based on calculating unemployment as it was it was done in 1990 the actual rate may be closer to 22 per cent. The current U3 number leaves out longer term unemployed, part time workers looking for full time work and very long term unemployed. If your unemployment insurance runs out the person falls out of the U3 number to the U6 number.

Today, with the future liabilities of Social Security, Medicare and Medicaid estimated (conservatively) to be about US$50 trillion or (more liberally) at upwards of $200 trillion, the US, with a debt at over $14 trillion and rising, has little chance of ever recovering or ever being able to pay it back. It has been said that the US could tax 100 per cent of income and still not be able to cover its commitments.

Further, the world is rife with imbalances. The US is the largest consumer in the world and imports heavily, creating huge trade deficits. It also runs huge budget deficits to finance entitlements and the Pentagon that finances the war machine. The US dollars circulating throughout the world, either because of general imports or because of oil, are recycled back into the US to purchase their debt. All of this appears to have worked reasonably well over the years but now the model is coming under severe stress. These global imbalances are not only causing problems for the US they are causing problems for other countries as well.

If the US were any normal country, its currency would now be in complete collapse and it would be arranging for IMF bailouts such as Greece and Ireland saw recently. But because it is the world’s reserve currency, the US has one big advantage: it can just print more dollars.

This strategy has unnerved the holders of US debt, led by China, which is estimated to hold almost $900 billion as of December 2010. Japan also holds almost as much. The UK has over $500 billion. Almost 60 per cent of the US debt held by foreigners is in the hands of just those three plus the oil producing nations led by Saudi Arabia. Of the total US debt of over $14 trillion, over $9 trillion is held by the public and roughly half of that is held by foreigners.

No wonder there are calls for an end to US dollar hegemony and a new Bretton Woods agreement to determine a new world reserve currency, and possibly even bring back a gold standard. The calls have ranged from the IMF, the World Bank, and many countries including France and Germany and of course China, the country that has the most to lose, given its large holdings of US dollars. Even Saudi Arabia has joined a group of countries seeking an alternative for the pricing of oil solely in US dollars. China and Russia are now conducting trade between themselves in Yuan and Roubles.

US debt is vulnerable to a downgrade as well. The IMF and the rating agencies have issued numerous warnings about the US debt situation. The effect of the US losing its AAA rating could be a financial earthquake. The US is also approaching its legal debt limit and, with the rift in Congress, the Republicans have threatened not to grant a new, higher debt limit. This could in the worst case result in the shutdown of government and a US debt default. This is not to predict that any of this will happen, but only to point out that it could.



Some are also saying that the so-called quantitative easing, or QE, could spiral the US into hyperinflation. While there are currently few signs of it, an event such as an oil shock in the Mid-East could trigger severe inflation which in turn could trigger further QE and start an acceleration in monetary inflation. Sharply rising oil prices have a history of causing recessions so it could stop the current feeble recovery in its tracks. An economy reeling from higher oil prices plus rapid monetary inflation could soon spiral out of control.



In the midst of all of this it is no surprise that gold has soared over 450 per cent in the past decade. Although relatively flat thus far in 2011, gold is up almost 28 per cent since the end of 2009. It is becoming an alternative currency. The world’s central banks still hold some 30,000 metric tonnes of gold, and investment demand for it has brought investment holdings in line with what is in the world’s central banks. In many countries, particularly in Asia, gold is seen as a savings vehicle rather than the speculation it seems to be viewed as in North America.



It is not so much that gold prices are rising but that fiat currencies led by the US dollar are declining. The chart of gold shows the stair step action that has taken place since the double bottom lows of 1999 and 2001. The action since that time has seen a series of triangular patterns form that continually break to the upside. And gold is rising not only in dollars but in all currencies, as the series of charts below attest.



Finally not only is the US Dollar Index declining the trade weighted Dollar Index is also falling. The trade weighted Dollar Index called the Broad Index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares. In some respects this more fairly reflects the value of the US dollar then does the more broadly watched US Dollar Index. The US Dollar Index is a weighted valuation against a basket of 6 major free trading currencies. Notably the US Dollar Index excludes the Chinese Yuan.




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Peter Schiff Says Run from U.S. Dollar

The payroll report on Friday confirmed what many of us knew, that the outrageous monetary and fiscal stimulus has failed, and that sends a signal to all of us that we should flee the U.S. dollar, says Peter Schiff.

Rather then following in the footsteps of other countries, which have been removing stimulus, the U.S. is actually planning on increasing “quantitative easing,” which is just a fancy phrase for printing money to acquire government debt.

That will bring even more pressure on the dollar, and drive its value down even more. The U.S. Dollar Index has dropped eight weeks in a row, and will probably continue to do so in light of the misguided government policies.

If quantitative easing resumes, which at this point appears inevitable, some believe it will kill the dollar as we know it. One of those is St. Louis Federal Reserve President James Bullard.