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Et tu U.A.E...?

Kuwait and Syria just cut their currency pegs to the US Dollar...

SOMETHING STRANGE is going on with Team America's financial markets. The fact that Kuwait and Syria just cut the peg linking their currencies to the price of the US Dollar just goes to prove it. The United Arab Emirates may be next according to a story on Bloomberg.

   US financial assets are rising to new records, but only in US Dollar terms. The greenback itself isn't getting any love from international investors. Why would that be?

  
Rising US stock prices don't do non-US investors any good if the currency those stocks are rising in is itself falling. Stocks rise, Dollar falls...net effect equals zero.

  
If the Dollar falls faster than stocks rise, that makes the rise in US stocks irrelevant for international investors looking for a real return on their cash. Or, in plain terms, a falling Dollar makes US stocks a losing investment for foreign investors.

  
Why is the Dollar falling? The US government, through the mis-management of its currency and its balance sheet, has completely undermined global confidence in the Dollar.

  
You probably already know this. In fact, everyone in the world seems to know it. But until now, it's been too much trouble for most global investors to do anything about it.

  
Everyone uses Dollars. It's the world's reserve currency. Switching to something else is impractical and, as Al Gore might say, inconvenient.

  
But the truth is, holding Dollars or pegging your currency to the value of the Dollar has caused inflation worldwide. Countries pegging their currency to the Dollar have essentially imported US monetary policy – and a loose policy at that. If the US increases the supply of money, then Dollar-pegged countries must do the same thing to maintain their peg.

  
Thus, when the Fed inflates, then China, Syria, and anyone else tied to the Dollar inflates too. It's like sympathy binge eating, only with money. And if it sounds like a destructive race to lower purchasing power – or as my friend Greg Weldon calls it, the global competitive currency devaluation race – well it is. But the race may be over for some nations.

  
Syria has unpegged from the Dollar. "The decision is final," says Syria's central bank Governor Adib Mayaleh. The country will link its currency to a broader range of other currencies that are not the US Dollar. "This will help stabilise the Syrian Pound and bring down inflation," Mayaleh adds.

  
No offense to Syria, but it's a bit player on the global monetary scene. It doesn't even have any huge oil surpluses. So why does it matter? The answer comes at the margin of the global economy and financial markets.

  
Syria doesn't sell oil or consumer goods to the US. Therefore, Syria has no huge US Dollar profits in can recycle back into American markets. Syria, in other words, gets all the inflationary, wealth-destroying ills of being linked to the Dollar, but no real benefits.

  
So it's shrugged off the regret you have when you say goodbye to something familiar and moved on.

  
Will the rest of the world follow? Not all at once. According to the International Monetary Fund Data, the Dollar accounts for 64.7% of global forex reserves. The Euro accounts for barely a third of that. There is no other major contender, although a basket of commodity or energy currencies are certainly attractive, meaning national paper, backed indirectly by revenues from real resource wealth.

  
Truth be told, however, holding the paper currency issued by a nation state – and managed by a central bank – may not come to prove the world's preferred method of storing wealth.

  
For storing wealth, physical gold bullion and other hard assets may well regain their role as long-term stores of value and wealth.

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles
 

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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