Kuwait ends its Dollar peg

What will the Persian states buy instead of US Treasuries...?

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Or to learn more about the near-term outlook for the US Dollar – and by extension, the price of gold – read on below...

Doug Casey
Casey Research

KUWAIT BREAKS THE PEG
by David Galland

MANY YEARS AGO a successful forex speculator told me how to spot what a government was going to do with its currency.

   Listen to what they say they aren't going to do...and then expect the opposite.

   On March 3 this year, for example, we got the following report from Bloomberg:

   "Saudi Arabia, the United Arab Emirates and four other Persian Gulf nations will discuss revaluing their currencies' peg to the US Dollar before a proposed monetary union in the region in 2010.

   "The states would only change the Dollar peg simultaneously, UAE Central Bank Governor Sultan Bin Nasser al-Suwaidi told reporters today. The six countries form the Gulf Cooperation Council and their central bank officials next meet in April. The other countries are Bahrain, Qatar, Oman and Kuwait."

   In Dubai, al-Suwaidi told the newswire that "[the UAE] will not act unilaterally."

   Then on March 15, Bloomberg followed up with this:

   "The Dollar may be buoyed after the six Gulf Cooperation Council members, which include Saudi Arabia and Kuwait, agreed not to revalue their currencies against the US currency.

   "'We have no plans to revalue,' Hamad Saud al-Sayari, the governor of the Saudi Arabian Monetary Agency, told reporters in Dubai today. 'The US Dollar is still very important to us.'"

   But apparently, someone forgot to copy the Saudis on the memo – because on March 20, Kuwait announced that it was tossing the Dollar peg over the side and replacing it with a basket of currencies.

   This will almost certainly lead to a domino effect in the Middle East, a move that would likely be warmly welcomed by the local citizenry there, and not so warmly welcomed by those in the US government charged with maintaining the US Dollar hegemony.

Then there's China...

   On announcing last year that it was forming a new agency to help better manage its foreign reserves, China took pains to assure the markets that they were not doing so in order to begin unloading Dollars.

   But on May 18, 2007, Beijing announced it was going to invest $3.3 billion in Blackstone, a private equity group.

   Now, you can be assured that Blackstone is going to go all out to impress their deep-pocketed new partner. And it won't impress them very much if they only buy US stocks that have to then fight against the tide of a depreciating Dollar.

   In our view, this is just the beginning of a much larger strategy, the core of which will be trading out of US Treasury bills and into all manner of other investments – an international basket of stocks, natural resource deposits around the globe...

   Pretty much anywhere and anything offers the prospect for a higher return with lower currency risk.

   Alternatively, if the currency risk is going to be taken, then the potential returns will have to offset those risks. Earning a 4.5% yield on a US Treasury bond while taking a 10%, 20% or even 30% risk on the US Dollar doesn't make a lot of sense to us here at Casey Research.

   We suspect it doesn't make much sense to the Chinese authorities, either.

   There are some very interesting implications in all of this. For instance, if the Chinese slow down their buying of US Treasuries in favor of other asset classes, who is going to step up to take their place?

   Of course, at the right interest rate – far higher than those on offer today – someone will. But then there's that whole collapsing US housing bubble to consider. Washington continues to be stuck on the horns of a dilemma, wedged squarely between a rock and a hard place.

   Raise interest rates to head off a devastating mass exodus from the Dollar and sink the economy...or lower interest rates to keep the economy afloat – starting with real estate – and doom the Dollar.

   Or option #3 – simply continue printing money like there's no tomorrow, steadily devaluing the $6 trillion in the hands of foreigners, and hope no one will notice.

   There are times, like today, that any reasonably astute observer can look to the horizon and see what's coming. A monetary crisis is headed in our direction, and the pace of its arrival is, in our view, quickening.

   Gold, and for more pep in your portfolio, gold stocks, are no longer an option but a prerogative – even for conservative investors.

   Meanwhile, pay close attention to the comments of high government officials worldwide about their intentions towards the US Dollar.