Friday, November 13, 2009
The US Dollar May Soon Be a Footnote
In case you missed it, India purchased 200 metric tonnes of gold last week from the International Monetary Fund (IMF). In exchange for the gold, India had to fork over $6.7 billion.
While gold sales by the IMF are nothing new, the timing and magnitude of this sale caught the attention of financial players around the world. One reason for the surprise is that gold was trading at over $1000 per ounce. It is believed that India paid $1,045 per ounce. Why would India be so eager to buy gold bullion at its peak price? After all, isn’t one of the central tenets of investors buy low, sell high?
When you dig a little deeper into how the deal went down, the answer becomes quite apparent. For starters, India did not pay for the gold with Special Drawing Rights (SDRs). SDRs, loosely speaking, are a form of book entry “currency” used by the IMF for the settlement of international trades. India bought the gold with cold hard cash – specifically with US Treasury Bonds that were part of its foreign currency reserve holdings.
Translation: India is dumping its US dollars!
And they are not alone. China, the biggest foreign owner of US debt, has been trying to unload their US dollars as well. Currently, China owns about $900 billion in US Treasury bonds. All the quantitative easing (i.e. printing money) that the US Treasury has recently engaged in to "stimulate the economy" and bail-out failing companies has not gone over well in Beijing, as it dilutes the value of the dollars they hold.
China is fed up! They have been very vocal in their calls for a new reserve currency to replace the dollar. Moreover, China, along with Russia, Japan, France and several Gulf States (Saudi Arabia, Abu Dhabi, Kuwait and Qatar), have suggested dropping dollar pricing of oil.
If the new currency plans do come to fruition, China will need a hedge to protect against the inevitable losses it will see in its dollar holdings. Because of this, many gold traders thought China would have been the one to buy the IMF’s gold. Actually, they may be doing so as you are reading this, as the IMF still wants to unload another 200 metric tonnes of gold to balance its book.
Translation: China, Russia, Japan, France, Saudi Arabia, Abu Dhabi, Kuwait and Qatar don’t have much faith in the dollar either!
You can also add Brazil and Iran to the list.
Brazil said it would support non-dollar payments for oil. And in September, Iranian President Mahmoud Ahmadinejad ordered his county’s foreign currency reserves to be switched to euros. Incidentally, Saddam did the same thing just a few months before the neo-cons unleashed “shock and awe”. I'm not trying to imply the two events were related. I’m just sayin’.
I don’t think it takes to much brain power to realize what is going on. We are witnessing a major shift in global economic power from the West to the East. World Bank President, Robert Zoellick essentially confirmed this, stating. "One of the legacies of this crisis may be a recognition of changed economic power relations".
When you boil it all down, there are several inescapable conclusions. The world is losing faith in the dollar. This is bad news for the US. Currently, our economy is being fueled by the willingness of foreign countries – primarily China – to loan us money by buying our debt. The fact that they are dumping dollars and stocking their reserves with gold suggest that they won’t be loaning us much money much longer. The feds will then turn on the printing press to pay the bills, which will trigger hyperinflation. As a result, the value of your dollars will steadily decline until the point where they are essentially worthless.
Long before this point has been reached, the world is going to dump the dollar for a new international reserve currency (more likely a basket of currencies). With all the gold heading East, those countries will be the ones who decide what currencies go in to the basket. As history has shown, a shift in military power will likely follow.
With all this in mind, it might be a good idea to exchange your dollars for some tangible assets. But you might not want to dump them all. You never know, they may come in handy.
Image Source: Retarded Minds