You've been reading about a dollar crash for years from many of the fearmonger peddler's of gold, newsletters, or anything else they sell to those who succumb to the influence of those who latch onto certain philosophies that will cause Armageddon to occur in the markets and why you need to be in gold. What you'll hear from me is an unbiased opinion to the contrary, and it comes from someone who sells gold for a living.
The latest fear mongering occurring comes from Jim Rickards, who has been pushing a free report "Dollar Collapse Preparation Plan and his new book The New Case for Gold with a hook up now through the Daily Reckoning fear marketing machine. What Rickards tries to do with his timetable for the dollar's demise is make the case that come September 30, 2016, the Chinese yuan is added to the Special Drawing Right (NYSE:SDR) basket of currencies. From the IMF;
The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. As of March 2016, 204.1 billion SDRs (equivalent to about $285 billion) had been created and allocated to members. SDRs can be exchanged for freely usable currencies. The value of the SDR is currently based on a basket of four major currencies: the U.S. dollar, euro, the Japanese yen, and pound sterling. The basket will be expanded to include the Chinese renminbi (NYSEARCA:RMB) as the fifth currency, effective October 1, 2016.
The decision to include the yuan or renminbi was made December 1, 2015 and becomes effective after the close on September 30th, 2016.
Rickards believes that the U.S. dollar "will cease to function as the global reserve currency" and that assets will be traded in SDR's, not in dollars. But there is a problem with this line of thinking.
SDR's before the inclusion of the Renminbi consists of 41.9% US Dollars and after the inclusion will be at 41.73% with the Renminbi weight being 10.92%. This 10.92% is primarily taken from the Euro which loses 6.47% of the SDR weight, Yen which loses 1.07% and British Pound which loses 3.21%. The US Dollar loses 0.17%.
If the SDR's consist of 41.73% US Dollars, how can it cease to function as the global reserve currency as Rickards states.
In fact, if the Dollar Index is priced in Euro's at 57.6%, Yen at 13.6% and the Pound at 11.9% and all 3 of these are being reduced to make room for the Chinese Renminbi, wouldn't this by default be dollar bullish? The Renminbi is NOT part of the Dollar Index but the reduction in the need for these currencies to support the SDRs, which are valued at approximately $285 billion means that about $28 billion of Euro's, Yen and the Pound will be dumped on the market.
This type of SDR propaganda as been going on for 6 years with Rickards as reported on a post written Jun 15, 2010 on Zerohedge; Jim Rickards On The Reserve Currency Transition From Dollars To SDRs, Gold, And Much More where he said; "In other words, there is no way out, absent another hyperinflationary episode. But it will take time for the G-20 to realize just how dangerous of a corner it is in. By then the China-Germany-Russia axis will likely be complete."
Rickards was referencing those countries in the last 3 paragraphs of coming up with their own commodity based currency, like with gold, which we'll get to in a moment, but those who continually call for a dollar crash or hyperinflation, don't understand truly what a dollar is, and anything else is speculation on what may or may not occur. And this analysis comes from a guy who sells gold for a living and thinks it is needed as part of a well diversified portfolio. But you'll never see me sell it based on "what if" scenarios as I try to lay out all the facts so you can make good decisions.
I did write a book called Illusions of Wealth where I make a strong case for gold, but there are certain things that have to trigger before we're off to the races with gold.
Hyperinflation occurs when a country loses faith in a currency, like the Weimar republic after the war and Zimbabwe with extremely high unemployment, lack of production and corruption. The U.S. GDP, while low during the Obama administration, even with an additional $9 trillion thrown at it (added to the National Debt), is still a military powerhouse and the dollar is "perceived" as a last bastion of safety. Why else would treasuries iShares 20+ Year Treasury Bond ETF(TLT) be so strong. I have been saying to buy (NYSEARCA:TLT) for quite awhile now.
Currencies or SDRs Backed by Gold or a New Gold Standard?
Rickards makes the case that we could have a new gold standard as long as the price of gold moves to $10,000 an ounce or higher, to "restore confidence" in the dollar. This could be a 40% backing or something to that effect. Source One and Two.
I do agree that a gold standard could exist with a higher price of gold, but you won't see me promote such. However, no one can convince me that the dollar isn't viewed as being as good as gold the world over DESPITE all the issues the U.S. has with over $19 trillion of National Debt and future debt obligations. Why? Because the rest of the world isn't exactly in a good position, whether it be banking issues in China, Germany and Italy, terrorism and ISIS issues, refugee crisis in Europe, worse debt to GDP ratios, worse future obligations, worse growth and production data or aging populations. This is why I am dollar bullish. It's all about perception, or the lesser of two evils.
Speaking of the lesser of two evils, I will make a comment on the political front as we head into the first debate. Congressman Obama called President George Bush a hypocrite for raising the national debt $4 trillion while running for office in 2008. President Obama has raised the debt $9 trillion and 2 years ago Congress (both sides) passed a "balanced budget" that called for 9 more years of spending (adding to the National Debt) and the 10th year coming in under budget. No matter who is elected, there will be more debt, that's a given.
When money velocity picks up with a tick up in interest rates (with or without the Fed), that's when it's the beginning of the end game for debt. Until then I see a deflationary contraction, primarily triggered by China and Europe and we'll see what Japan has up its sleeve Tuesday evening into Wednesday morning where the Fed has nothing up their sleeve but "talking the talk." Same as last year.
Presently I am dollar bullish here. 100 on the Index is in the future as the U.S. will be viewed as the last bastion of safety when the contraction takes hold. Remember, the Asian financial crisis started with little old Thailand weakening the Baht. Where will this next crisis trigger? China sure isn't ready to back their currency with gold as some will tell you. Not with their current liquidity issues in their banking system.
Take the Fear Out of Investing In Precious Metals
My advice on buying gold has always been the same. Dollar cost average into an allocation and take the guessing game out of it in catching a bottom. Gold may or may not fall from where its at during a credit contraction if it were to take hold. If it does, buy more lower. If it goes higher, buy more. If you bought lower or higher, you just have to have the confidence that it will continue higher. Answer this question for yourself; do you see the DOW doubling to 36,000 or silver doubling to around $40 first? If the answer is silver doubling, then why not add it to your portfolio? Are you fearful that the stock market will fall from here or silver? You can profit with metals by purchasing ETFs like iShares Silver Trust ETF (SLV) or for gold SPDR Gold Trust ETF (GLD), or if you are looking for physical I recommend buying coins and bars that are the lowest cost to spot by comparing dealers.
The way I picture the price of metals right now is the same as buying the DOW in 2009. Some bought at 8500 and some bought lower at 7500. But with the DOW over 18,000, they both are happy and can lock in that profit and allocate to other assets if they feel the stock market is toppy. We do know that gold and silver aren't toppy when you zoom out the last 5 years.
Disclosure: I am/we are long PHYSICAL METALS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.