Currency Regime Change

By: Doug Casey | Fri, Jul 28, 2006
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There is a major change coming that will catch most investors by surprise: the end of the U.S. dollar as the de-facto world reserve currency.

Play it right and you can make life-changing returns.

Central Banks Looking to Exit the Dollar

In the International Speculator, we've often mentioned the inevitable move by central banks to diversify their reserves out of the U.S. dollar. We've noted that, apart from the current situation, there is no precedent for any non-redeemable paper currency being held as the primary reserve of the world's central banks.

That diversification out of the dollar, with a lot going into gold, has begun. A regime change is afoot -- though few have yet recognized it.

Recently, Russian President Vladimir Putin ordered the Russian central bank to raise the gold share of its foreign reserves from 5% to 10%. That's no small matter, given that Russia's reserves have surged to $247 billion -- the world's fourth largest.

Accomplishing the shift to 10% gold would require purchasing 21 million ounces of bullion, which is about one-quarter of the world's annual mine production. And thanks largely to oil exports, Russia is accumulating additional foreign currency reserves at a rate of about $100 billion per year. With reserves growing so rapidly, just keeping the gold portion at 5% would require Russia to absorb a big slice of the world's mine output.

Meanwhile, in China, Monetary Committee member Yu Yongding is not alone in calling for Beijing to diversify its $875 billion reserves into gold to protect against a tumbling dollar. We quoted him last month, saying: "We need to use some of the reserves to buy other assets such as gold and strategic resources such as oil." More recently, Zhao Qingming from the Chinese central bank's Financial Research Institute and Luo Bin from its accounting department wrote in a note published in China Money Market that using some of China's forex reserves to buy gold could "maintain and raise the value of China's dollar holdings." That conclusion seems questionable, but the important thing is that more Chinese officials are jumping on this bandwagon. It's an idea whose time is coming -- soon.

Given the trillions of U.S. dollars washing around the world's monetary system, these are not inconsequential developments. Quite the contrary. They greatly favor gold and other tangibles. What's the alternative for a dollar-heavy investor or central bank? The Who-Owes-You-Nothing euro? Or the yen, which is the proximate cause of the current bubble? How about the Zambian kwacha or the Vietnamese dong? I think not.

What's Next?

As explained in the April 2006 International Speculator article, Seasons of Gold, thanks to the traditional seasonal pattern, buying will pick up in August, which should kick gold solidly back into gear. After that, as the wheels start to come off the global economy, I expect gold to gain serious upside momentum. That's not to say there won't be corrections, even substantial ones, along gold's trek to $2,000 and beyond. There will be. But the trend for higher gold prices is firmly entrenched.

While there are many reasons for that trend to accelerate, the most important is the desire to hold the metal. That's why it's so significant that investment demand for gold is up 37% over the past year, much of the latter flowing into the more easily accessible and convenient Exchange Traded Funds.

Demand will only rise as the months go by and everyone from central bankers to oil sheiks to hedge fund managers to everyday Joes piles into gold out of distrust of the U.S. dollar... and of the government that purports to stand behind it.

And pile in they will, because money debasement is still very much the name of the game. If you were one of those resource stock investors who started to panic at the depths of the recent gold correction, take heart: the big-picture, fundamental reasons for holding gold -- and especially high-quality gold and silver shares -- are as much with us now as they were a month ago, and gold's continuing march upwards is far from over. In fact, I suspect in the historical context, it has hardly begun.

Central banks bailing out of the dollar, the wheels coming off the U.S. economy -- the nightmare of every investor. Or maybe not... If you invest wisely now, the emerging paper bear market will eventually prove in your favor. As foreign governments look to avail themselves of more gold for their reserves, you should do the same. And investing in gold and other natural resource stocks is a strategy that promises even higher returns... if you pick the right companies.

For more than a quarter-century, Doug Casey has traveled across the globe and kicked rocks at remote mine sites. His goal: to find the best opportunities that can generate double and triple-digit returns (and sometimes much more)... usually within 12 to 24 months. Learn more here.

 


 

Doug Casey

Author: Doug Casey

Doug Casey
Chairman
Casey Research, LLC.

Doug Casey

Doug Casey is a highly respected author, publisher and professional investor who graduated from Georgetown University in 1968.

Doug literally wrote the book on profiting from periods of economic turmoil: his book Crisis Investing spent multiple weeks as #1 on the New York Times bestseller list and became the best-selling financial book of 1980 with 438,640 copies sold; surpassing big-caliber names, like Free to Choose by Milton Friedman, The Real War by Richard Nixon, and Cosmos by Carl Sagan.

Then Doug broke the record with his next book, Strategic Investing, by receiving the largest advance ever paid for a financial book at the time. Interestingly enough, Doug's book The International Man was the most sold book in the history of Rhodesia.

He has been a featured guest on hundreds of radio and TV shows, including David Letterman, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin, Maury Povich, NBC News and CNN; and has been the topic of numerous features in periodicals such as Time, Forbes, People, and the Washington Post.

Doug, who divides his time between homes in Aspen, Colorado; Auckland, New Zealand; and Salta, Argentina, has written newsletters and alert services for sophisticated investors for over 28 years. Doug has lived in 10 countries and visited over 175.

In addition to having served as a trustee on the Board of Governors of Washington College and Northwoods University, Doug has been a director and advisor to nine different financial corporations.

Doug is widely respected as one of the preeminent authorities on "rational speculation," especially in the high-potential natural resource sector.

Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained herein is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed herein are those of the publisher and are subject to change without notice. The information herein may become outdated and there is no obligation to update any such information. Doug Casey, entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications. Corporate policies are in effect that attempt to avoid potential conflicts of interest, and resolve conflicts of interest that do arise in a timely fashion. No portion of this web site may be extracted or reproduced without permission of the publisher.

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