Currency regime change
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
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
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
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
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.