The Singapore Dollar And West-To-East Wealth Transfer

Includes: EWS, FXI, GLD
by: Simit Patel

The Singapore dollar has been a currency that I've been bullish on for the past few years, and remain so. I believe we are in a transitional phase in which gold will be re-monetized and the US dollar will lose its status as reserve currency and thus depreciate against most other G8 currencies -- as it has been over the past 10 years. I think Singapore will appreciate more noticeably other currencies, and as such constitutes a noteworthy investment opportunity.

Along these lines, there are two news stories that are worth observing:

1. Singapore is Becoming a Gold Hub. Singapore's finance minister, Tharman Shanmugaratnam, recently said that gold and other investment grade precious metals will be exempt from a goods and services tax. This is clearly an attempt to draw investment capital into Singapore, and I think it is an astute move in that regards; gold bugs typically have a dislike for government and a wariness towards the potential for their gold profits to be excessively taxed. I already favored holding gold bullion in possession and in vaults over ETFs like GLD; this move makes me want to look at vault storage options in Singapore, because I think the epicenter of gold is headed East.

2. Derivatives Regulation. Martin Armstrong's latest essay on Singapore (pdf) notes that Singapore is reforming its derivatives laws, and thus is positioning itself to be a safe place where financial transactions can be conducted and investment marketplaces can operate. Here's a quote from Armstrong's essay that summarizes the situation succinctly:

The Monetary Authority of Singapore (NYSE:MAS) is aiming to revamp the way derivatives contracts are traded to reduce the risk of a MF Global/Lehman Brothers-style disaster over there where the US Regulators will NEVER do the job. The most important change will mean any trades in these complex derivative products will be cleared at a central institution such as the Singapore Exchange (SGX). This will wipe out the US market and the only safe place will be Singapore. This seems to be falling perfectly in line with our computer model that shows the Financial Capital of the World is shifting to Asia.

Singapore has become the most important derivatives market within Asia. The market there has displaced the US and Japan and has reached about US$9.8 trillion (Singapore $12.3 trillion) a year. This is an incredible market that has been dominated by foreign exchange, oil and debt markets. About US$700 trillion of such contracts are traded globally on an annual basis. With Singapore actually regulating instead of being bought and paid for, it may become the new Financial Rome/Mecca.

On the flip side of the equation, the situation with the US dollar remains the same: twin budget and trade deficits that remain very large ensure the dollar remains on the track towards further devaluation. While Singapore's economy, and most other economies in the world, are experiencing heavier burdens of debt, I think Singapore is more likely to go the way of Japan and experience more symptoms of a deflationary spiral than the woes of price inflation and currency devaluation.

This is largely because the Singaporean culture is one, like Japan, which favors savings -- and so I think sovereign debt is more capable of being purchased by the citizenry. As such, I think debt will lead to currency devaluation in a much slower fashion, as Japan has experienced. So at least for the next few years, I think the odds favor a depreciation of the US dollar relative to the Singapore dollar.

In terms of the bigger picture, I believe the rise of Singapore is a part of the wealth transfer from the West to the East, as Martin Armstrong has observed. Accordingly, I think speculations predicated upon an anticipation of capital flows out of the US and into China are prudent and more likely than not.

In terms of investment vehicles to play this, I prefer the forex market and trading the USD/SGD exchange rate; for stock market aficinados, relevant ETFs may be EWS for Singapore and FXI for China. Moreover for those in the gold market, I think options to store gold in Singapore and trade gold derivatives contracts on Singaporean exchanges will increasingly prove to be safer than trading or futures contracts in the Western world.

Below is a chart of the US dollar/Singapore dollar exchange rate that illustrates the current technical situation. I think a break above the 200 EMA is unlikely, while a re-test of previous all-time lows is a probable event.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am long physical gold and may initiate a position in the Singapore dollar soon.