Even Hijackers Shun Dollars
The Texas Hedge Report
While we all read the headlines about how the Dollar has lost 50% of its value over the last two years, many financial reporters still don't seem to get it. They are reporting in terms of currency trading ranges where the real story is the coming paradigm shift where the Dollar will lose its status as the world's reserve currency. Jimmy Rogers, one of our favorite investment personalities, often explains that the best way to really understand what is going on in a country is to look at the black market. For example, many of our Russian-American acquaintances tell us that their Muscovite relatives are stashing euros under their mattresses instead of dollars. This may sound insignificant until you realize that many Russians (and other 3rd world citizens) do not trust local banks.
Some of our friends who travel in the countries of "new" Europe such as Estonia, Lithuania or Latvia tell us about how the dollar has lost its prestige there. To be fair, all of these countries are now in the European Union and will eventually adopt the Euro. But still, it is amazing to see how just in the last few years much the perception of the Dollar has shifted for the worse.
Just a few days ago, the South China Morning Post reported that Chinese upper and even middle class citizens are lining up in the streets of Beijing and Shanghai to exchange Dollar savings for gold bullion. Chinese citizens, whose Yuan is pegged to the Dollar (which produces negative real interest rates), are now seeking to diversify in the face of an increasing current account imbalance as well as a likely revaluation in the coming years.
Because foreigners are much better acquainted with foreign exchange rates and currency movement, they are usually way ahead of Americans in this category. The sounding of the Dollar alarm by the French was what led to Richard Nixon's Dollar devaluation. Thirty years later, it seems that the Dollar alarm is being cranked up again by the Asians, Europeans, Arabs and just about anyone who doesn't watch CNBC. Speaking of CNBC, it was funny to watch former General Electric CEO Jack Welch explain yesterday how more government borrowing will lead to growth and therefore a strong Dollar.
So how do you protect yourself or even profit from this coming Dollar crisis? Surprisingly, we don't think the answer is to load up on euros or other currencies. While we think the Dollar is in bad shape, we think the Euro, Yen or Aussie Dollar are not much healthier. Some of those countries' governments run deficits as a percentage of GDP that are in line with America's. Therefore we expect a series of competitive currency devaluations which will likely result in inflation around the world. The only currencies that you should consider to be "safe" are the world's two oldest - gold & silver.
December 16, 2004
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