A story I've written about many times on Seeking Alpha is the ongoing demise of the U.S. dollar. This article will take a look at China's recent decision to allow the yuan to float more, which is a significant milestone on the path to a new monetary system and the ongoing dollar devaluation that such an event implies. But first, let's run through some of the history that led to this point, so that we can evaluate the news in the appropriate context.
First off, the U.S. continues to run a trade deficit. Yes, the deficit has showed signs of narrowing, but it is still there. So long as the U.S. is importing more than it is exporting, international trade flows will naturally have the impact of pushing the value of the dollar down.
Second, the U.S. budget deficit is an even bigger problem, as it recently hit a new record high. Deficit spending means the U.S. must borrow more to sustain its operations. Given that the U.S. national debt is at $15.5 trillion and counting at the time of this writing, raising even more debt is an increasingly difficult proposition (as the Treasury bond market is reflecting). The harder it becomes to find lenders, the more the Federal Reserve will need to "monetize debt" - a fancy way of saying printing money and lending it to the government, to be paid back with a fee. Given that money supply continues to soar to new all-time highs, this seems to be an especially dicey proposition.
Many who recognize the situation at hand are calling for a new international monetary system of some kind. Many gold bugs, myself included, would prefer to see a system in which gold is formally recognized for its monetary value in some way. Most notable are the calls from the IMF for an alternative to the U.S. dollar, and the proposition that it should use Special Drawing Rights - a currency controlled by the IMF - as the keystone of a new international monetary agreement. The IMF issued a fairly detailed white paper entitled, "Enhancing International Monetary Stability - A Role for the SDR?" to outline its plan.
China and France then launched a task force with the goal of getting the yuan included in the basket of currencies that make up SDR. One of the requirements for this is that the yuan be used more in international trade. Yuan-denominated loans to Latin American countries is thus an important milestone. Now, China's central bank is allowing the Yuan to float more against the dollar - trade in a wider range - which IMF Managing Director Christine Lagarde calls a "major step."
The implications for the dollar here are ominous. The writing is clearly on the wall. The dollar has been in a downtrend for 11 years now, and I think this trend is far from over - in fact I expect it to accelerate.
I prefer to play this opportunity via the forex markets, although for those looking for a convenient ETF to play this UDN may be of interest. And of course, a run out of the dollar would be bearish for bonds (TBT), bullish for stocks (SPY) and bullish for gold (GLD) - which does especially well in times of monetary instability.
International monetary policy is the mother of all macro events, and thus should be watched accordingly. When price moves opposite of what the macro trends are telling us, we know we have a buying opportunity in which assets are mispriced. For this reason, accumulating gold and equities on dips remains a strategy I regard as very prudent, one that may yield an outstanding payout when the transition to a new international monetary agreement is complete.
Additional disclosure: I am short the U.S. dollar in the forex market, and am long physical gold and select resource stocks.