When the Dollar Crashes, All That Glitters Will Be Gold 14 comments
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It is not a matter of “if” the demise of the U.S. dollar is going to happen, but a matter of “when”. We have seen signs of its weakening in the last couple of years and it does not look like it will recover any time soon. The actions of a number of other countries are adding fuel to the fire and can only confirm that the best U.S. dollar hedge is gold.
The central banks of the world may have followed the U.S. in getting off the gold standard, in addition to having pegged their currencies with the USD, but not for much longer. They all know that a weak USD will affect their own financial systems if they are holding large reserves of the greenbacks. The only hedge is to dispose the USD and add real value into their monetary system by holding large reserves of the gold metal.
It comes as no surprise that countries like China, Malaysia, Indonesia, and Thailand are shifting from the USD. China and Japan alone own about $906 billion of the $1.1 trillion of U.S. Treasuries held overseas, so when they start to unload, it will only compound the situation.
According to Fan Gang, director of China’s National Economic Research Institute:
The U.S. dollar is no longer, in our opinion, is no longer a stable currency. It is devaluating all the time, and that’s putting troubles all the time. So the real issue is how to change the regime from a U.S. dollar pegging to a more manageable reference, say, euros, yen…
The real story is not if these countries are switching from being pegged to the USD to another currency like the Euro that may be stronger. The truth can be found in reading between the lines in what these countries are actually doing. China for example, had hinted in late 2005 that they will quadruple their gold reserves and started to buy gold by cashing in 2.4% of its U.S. dollar reserves.
Not to be outdone, the central banks of Japan, South Africa, Argentina and Russia have jumped on the bandwagon in building up its own gold reserves. Russia said it would increase its gold reserves from 5% to 10% of its total financial reserves. When many of the world’s top economies are dumping the USD and increasing their gold reserves, it should be a big clue as to their lack of confidence in the USD.
Their hoarding of gold is an indication of what they believe will be one of the best protections against a declining USD. If an individual investor wants to hedge against the USD and diversify their own portfolio, who better to take the lead from then the central banks of the world?
So how exactly does an investor add gold to one’s portfolio? Well, there are a number of different ways on how you can invest in gold. The following is a list of at least six options that are now available for investors to choose from.
- Direct ownership – Purchasing gold bullions or minted coins. There are disadvantages to buying gold in this form. Besides the costs of storage and insurance, there is normally a large spread between the bid and ask prices of gold bullions and coins.
- Gold certificates – Some mints like Australia’s Perth Mint, has a certificate and depository investment program in which investors can own the gold without having the inconvenience and risk of self storage.
- Individual stocks – An alternative to owning physical gold. You can buy stocks of established companies in the gold mining industry or take some risks with junior mining stocks.
- Gold mutual funds – These funds usually holds a portfolio of large gold production or mining stocks.
- Gold ETFs – Exchange Traded Funds trades like stocks on the stock market, however, these funds holds gold bullions as an asset. It is another alternative way for an investor to own gold. Two examples would be streetTRACKS Gold Trust ETF (GLD) and iShares COMEX Gold Trust ETF (IAU).
- Gold options and futures - Options allows the experienced investors a way to speculate on gold prices and is not recommended for the novice. The same goes for the futures market for gold. Futures are more complex and highly risky.
We can not predict when the USD will completely tank, but we do know that as the dollar declines, the price of gold will continue to rise. Consider this, it may seem a bit speculative, but inflation adjusted; the price of gold will have to reach $2000 per oz to match the high price it set back in the 1980s. At current prices, we still have some room to climb.
Additional gold resources:
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This article has 14 comments:
Hmmm, I think we need some regulation!
Watch, this year the Fed along with other Central Banks will aim to curb speculators from playing with their currencies and commodoties and gold will come back down to Earth.
I'm not so convinced that significant players are ready to embrace the Euro (or any other currency) in anything like a universal fashion. China, foe instance, most certainly is not shifting from the US dollar..they've had a plan for modest currency diversification in place for over a year.
Gold won't necessarily benefit from the specific "demise" of the US$..but it will gain greatly from a beggar thy neighbor approach to currency debasement..and that's what we'll see.
Any attempt to restrict FOREX transactions for any length of time would be catastrophic and ill founded.
If enough people think it will happen, it might become a self-fulfilling prophecy.
In a normal world this would be true, in a normal world the Central bankers would shake those speculators a bit down to the ground.
But we are not living in a normal world, this year the total of US debt on the economy will pass the 50 trillion threshold.
Follow the next link to the Federal Reserve Z1 release, the so called 'flow of funds' sheet:
www.federalreserve.gov...
And there is a little problem:
The total debt grows year on year with a speed of 8% (and is accelerating).
The interest on the 50 trillion debt is 2.5 trillion US$ a year (if you take a reasonable interest level of just 5%).
2.5 trillion is something like 18 to 19% of the entire gross domestic product and that is needed to stabilize the debt growth, problem is that this is above the total profits of the US economy.
So you see: the Central bankers are standing with their backs against the wall. As soon as the above easy to understand calculation hits the wires of the main stream media, the situation will explode and therfore European central bankers keep their ugly mouthes 'wisely' shut.
We live in a fake world on borrowed time my dear jimk07...
And gold? It needs to get above 2000 an ounce before we have a new inflation adjusted record.
What has perplexed me for quite a while is why the bottom doesn't fall out of the dollar. Because it doesn't always. The USD has had periods of strengthening even when the trade deficit continued to grow. Why are US treasuries "flight to quality" when they are losing value faster against gold and other currencies than the interest they earn? And yet, short and long treasuries are at 3-4% even now. How does that make sense? It doesn't, but that is and has been reality.
There are a bunch of reasons, and they won't last forever, but don't be too quick to assume the USD will continue or accelerate its drop over the short (1-6 months) term. The entire world financial system has a vested interest in dollar stability, mostly for irrational reasons. The dollar is the foundation of America's superpower status; we won't give that up easily, and quite a few other countries like that arrangement too. I am moving out of RYWBX for now in favor of ultrashorts and puts. A recession perversely may strengthen the dollar (lowers trade deficit) for a while. Remember that all those overseas dollars have to eventually buy something here in the US. One guess what that will be.
My guess is that the eventual collapse of the dollar, while imminent and inevitable, is a little ways off still. Look for major foreign investment in the US stock market after it has gone down significantly, before more dollars (trade deficit) become unwelcome. Another factor: most of the major currencies are inflating the money supply via "credit injections", so they will weaken with the USD. In the long run, gold and oil, but maybe not just yet.
Who will bail out the credit swap defaults?
Who will buy the REITS when commercial buildings drop in value and investors can't get out of their funds?
So if the FED and Treasury are the answer, what will that do to the dollar?
Looks like gold is the only way to protect yourself. I bought GLD today.
The Great Depression and Japan since 1990 show how ugly deflation can be and how hard it is to fight it once it gets started. Bernanke is not going to let that happen, regardless of the cost in terms of inflation. Ultimately, the Fed/US government can create as much money as they want. $9+ trillion of national debt ($400B a year of interest) -- does anyone really think we're going to pay that off? Actually, we will. We will write $9T (actually, it's much worse than that) of checks and the debt is paid off. Similar solution for Social Security, government pension obligations, etc.
The end result will be mega (less than hyper, I think) inflation. The dollar will drop to maybe 10% of its current value (that's what the ruble did after the USSR fell). Prices will go up x10, wages and Social Security more like x5 if that. Fixed-interest savings and fixed-payout pensions get killed. The dollar will lose its reserve status and we'll have to pay future bills in real money. Actually, the main currency of the future is going to be oil.
Now, if you think this through, the investment opportunity of a lifetime is sitting right in front of you. Can you see it? Think exponential as opposed to linear.
For the current round, I am in EEV, FXP, GLD, RXD, SJH, SKF, SMN, SRS, SZK, BEARX (35%), FSAGX, and almost out of RYWBX. That package is up 8.2% YTD. I am short (puts) BBY, CBG, DELL, EXM, MA, NWA, OEH, RWX, SPF, and AMZN. Those are up 35%, most bought in December.
I expect US stocks to lose significantly more over the next 3-9 months.