Is the Dollar 'Toast'?

By: Alex Wallenwein | Thu, Sep 25, 2003
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The only remaining question is: how dark would you like it?

The Europeans would like it to be a light, golden crisp. The more fanatical of our Arab and Muslim friends probably want it to be incinerated. The Chinese would likely prefer it pretty dark, but with visible, charred remains, so they can still show it off - like a trophy.

At the recent G 7 conference in Dubai, some pretty amazing statements were made by our world leaders. Statements that, to those unfamiliar with :'euro vs dollar' logic, most likely sound rather innocuous. But to those who understand this new paradigm of international monetary politics, these statements confirm how far the world has already progressed toward a final transition from the current (past?) dollar reserve system to something entirely new.

First off, there is the statement - or rather the hint - that the signatories of the 1999 Washington Accord have pretty much agreed to renew the accord next year, though with a certain gradual upward bias in gold sales targets.

Some gold commentators interpret this as a thinly veiled threat from notoriously gold-hating central bankers, who are unanimnously trying to beat the poor gold-investing masses into submission once again by signalling an intention to sell more gold in order to continue the old gold-suppression game.

The truth is, the days of unanimous anti-gold policies of the world's central banks are over. The fact alone that there is indeed a broad consensus to continue the Washington Accord is proof enough that the world's attitude toward gold has changed, and changed for good. This Accord was not just a one-shot deal. It was an announcement, from the highest levels of international finance, that the world's central banks will no longer support the US' blatant anti-gold bias - just in order to support the dollar reserve system.

In a world where the dollar was the world's only trade and reserve currency, such support was inevitable. The dollar was the only vehicle by which world trade could be expanded in the way it has been. But this is no longer so. As stated so many times before, an alternative now exists, and the world is reaching for it with both hands. This alternative is the euro, and it happens to be gold-friendly, in that the euro member banks value their gold stocks at market prices.

The talk of an increase in the original sales targets, rather than proving that the same old anti-gold bias is at work, is instead evidence that the world's policy toward gold has changed dramatically from, say, ten years ago. In a September 22, 2003 piece on Dow Jones Newswire by Brian Blackstone and Tom Barkley, the ECB's Wim Duisenberg reportedly confirmed - once more - that central banks "are willing to do anything required to keep markets calm and they are able to use all the instruments in their arsenal when it comes to adjustment and to help adjustment to go along smoothly and gradually."

He did not elaborate on what he meant by "adjustment," but one theme shines through every last of the ECB's policy actions under his guidance: Exchange rate stability is policy goal number one. That is significant because it is precisely that exchange rate stability that has been setting, and will continue to set, the euro apart from the dollar. It is that policy that elevates the euro in the minds of the world as the preferable reserve currency of the future.

It is this ECB focus on forex-stability, rather than managing the internal EU business cycle, that makes the euro so attractive to central banks and international traders, savers, and investors. In contrast, the US Fed is primarily concerned with keeping the US economy going, and hopefully out of any semblance of a recession -- no matter what. So Easy Al keeps on pumping and pumping the dollar spigot, ratcheting short term interest rates lower and lower, and intending to keep 'em there for a "considerable time" as he recently declared.

Meanwhile, the ECB follows suit only to an extent, so as to keep the EU economy from contracting too sharply, but not to such a degree that would divert the euro-zone from its primary policy objective: currency stability.

Even under pressure from the German, Italian, and French heads of state to "do more" to keep their respective economies out of trouble, Wim Duisenberg stayed his course. He even sternly reminded them on one occasion that the ECB does not bow to the demands of individual member states, and that their imdividual economies are indeed their own responsibility.

It needs to be understood that the euro, from its very conception several decades ago, was more than just a policy tool for internal monetary adjustments and intra-EU trade enhancement. It was meant from the get-go to eventually supplant the dollar, which from 1971 on forward, was widely regarded as a dying currency, a veritable basket-case.

But it was a basket-case that was still the only game in town.

The only reason the dollar survived this long, and even gained in forex terms during the last decade, was the necessity to keep the world's only reserve currency alive until another one was ready to take on the burden.

It was recognized early on that a pure fiat currency that competed with gold could not survive in the long term without enormous stress on the world economic system - for the simple fact that this "competition" diverts too many resources and too much macro-economic capital for the sole purpose of keeping the gold-price in check (or "check-mate", as some would have it).

Gold is a natural store of value that requires no trickery, deceit, or economic or poltical arm-twisting to be recognized as such. In contrast, the dollar's masters, who had the unenviable job of convincing the world that a totally unbacked dollar severed from any gold-convertibility was "as good as gold," were forced by necessity to engage in all kinds of political, economic, and monetary shenanigans to support that illusion.

Hence, the advent of gold and other derivative instruments, which were designed as hedges against all kinds of financial risks inherent in such a deceptive, often abusive, and economic resources-draining system. Hence, also, what has become know as the "gold-banking derivative crisis" with its over-extended gold bankers, overly hedged producers, unreported gold loans - and the producers' current world-wide drive to "de-hedge" as they hear the golden bells tolling.

The euro is now firmly established as a major component of virtually any central bank's forex reserve position. Even Canada, which is in more ways than one to considered to be "close" to the US, has almost as many euro reserves as US dollar reserves (about 13 billion in euros compared to 15 billion USD). The euro has gained sufficient depth - and breadth - even among individual world investors, savers, and speculators, that a gradual exit from the dollar-system and entry into a euro-based international reserve system has become possible.

That is the background before which the statements coming out of Dubai must be viewed. There is wide consensus among IMF officials, international economic leaders, central bankers, and even politicians, that the dollar is set to fall further from here.

In that vein, here is another gem, reported in a Reuters piece of September 22, 2003, by Yonggi Kangi:

"While the G7 meeting in Dubai over the weekend may not have contained the explicit language of the Plaza Accord, the desire to weaken the USD and spread the burden of USD weakness from Europe into Asia could not have been clearer."

Even the US seems "okay" with all that. Here is what one commentator had to say about the US position:

"The wording of the communique seems stronger language than we anticipated. It could be viewed as a victory for the U.S. side of the argument and for (U.S. Treasury Secretary) John Snow."

(John McKenna, quoted by Brian Blackstone and Tom Barkley in Down Jones Newswire piece referenced above). What he is referring to is primarily the US' leaning on Asian nations, primarily China and Japan, to let their currencies appreciate against the dollar to help even out the trade imbalances currently threatening the US system. But it also is a reflection of John Snow's famous (and last night re-iterated) "white man speak with forked tongue" policy to publicly claim he supports a "strong-dollar" while at the same time declaring that a falling dollar is just hunkydorey with him (in May of this year).

In the short term, such "adjustments" (there is that word again) would be beneficial to the US. A lower dollar vis-a-vis these Asian tigers' currencies would make imports into the US more expensive, hopefully boosting US consumers' spending at home, thus benefitting the domestic economy, and improve the US' export prospects.

The big question is: where and when will this stop?

Once this process is in motion, a weakening dollar will lower incentives for international investors to park their funds in dollar-deniominated assets. Decreased foreign-asset inflows, or downright outflows, would further weaken the dollar, wich will in turn weaken already shaken international confidence in the dollar, etc., etc., - a classical vicious cycle.

While a somewhat lower dollar, temporarily, could indeed be good for US exports and therefore the economy, a continuously dropping greenback will spell disaster for the US - and John Snow knows that.. The Bush administration's apparent satisfaction with the current downward adjustment may be nothing more than the administration resigning itself to the inevitable and making it look like it is "in control" by claiming that it "prefers" a lower dollar.

Yes, Mr. Snow. Certainly, Mr. Snow. But what are you going to say when the dollar never stops falling? Will you claim the administration wanted it that way all along?

The statements coming out of Dubai also underscore and confirm recent speculation on why the dollar has made its considerable recovery against the euro since May this year. It was the Asian "tigers" protecting their export-edge by manipulating their own currencies lower against the dollar. It was never the "booming" US stock market (bubble No. 2).

The reports of these statements out of the Dubai meeting convey that an unspoken, but clearly felt, consensus exists that the dollar will (and must) fall.

Couple these statements with the earlier released IMF draft report criticisng the US for its mammoth current-account deficit and predicting a sharply lower dollar, and you have a very clear policy direction that is shared by the entire world, and now - by necessity - even by the US: That direction is:

"Down with the dollar."

And all understand that this means: "UP with Gold!"

This IS the time to buy gold.

Gold will not be this cheap in fiat currency terms for decades to come. If the entire world (even minus the consistently weakening US) stands behind a higher gold price, who or what will stop Gold?

The US has not been able to do it alone, even during its economic heyday. Witness the Australian bombshell in 1997, the British gold auctions, the Swiss sales, the bullfrog-like posturing by Mr. Welteke during the nineties (without any real follow-through, of course), etc.

Sure, there will still be central bank gold sales. The Washington Agreement will be continued. Other nations will accede to it. The sales targets will gradually increase (or maybe not). But all of this will no longer be done to "squash" the price of gold. From now on the new policy is called "adjustment." A smooth transition, in other words, only to make sure the world system does not undergo more severe strains than abolutely necessary to ensure that the transition ultimately succeeds.

But all of this will from now on be done with a near-unanimous view toward a naturally higher gold price. When the time is ripe, gold will be allowed to find its absolute, politically undisturbed equilibrium. And that equilibrium is likely to be higher than anyone today imagines.

Looking for a time-table? A "road-map"?

Who cares! Gold is going higher, and there is a presently announced, international shared resolve not to stop it. Only to ensure that "adjustment" is ultimately successful.

Once it is successful, there is no more stopping for gold - because by then, all countries (minus the US?) will benefit from rising gold.

May our political/financial "masters" hear the bell tolling, and adjust their policies accordingly. If they do not, it's every American for him or herself.

Fiat hyper-inflation is much more easily endured with some hard assets under your belt. And the hardest of all hard assets is and remains - that funny yellow metal.

Got gold?


Author: Alex Wallenwein

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

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