FREE: JOIN 100,000+ READERS   

≡ Menu
SOVEREIGN MAN

The market is telling us that the dollar is finished

February 28, 2011
Tulum, Mexico

There’s major shift occurring right now in financial markets.

Sure, the food and freedom riots that are spreading across the globe are a major indicator that civil unrest follows very closely behind resource shortages and economic turmoil… but there’s something else that I’ve noticed recently– it’s a sea change in the financial system.

In the past, major crises normally caused investors to seek safe haven assets, and everything else equal, the dollar would rise. They call it a ‘flight to safety’, and investors would flock towards the perceived stability of US Treasury securities.

In 2008, for example, the Lehman collapse spurred the market to go rushing into the dollar. The pound, euro, S&P, oil, and gold all went into freefall, and the dollar surged. Anyone holding cash felt pretty smart, and the market paid tribute to the US dollar as the world’s safe haven currency.

There were a lot of reasons for why this happened. The US government likes to claim that it has never failed to pay on its debts. Of course, even the most cursory analysis would lead one to conclude that they trade debt for inflation… and more debt.

Regardless, when financial markets were collapsing in 2008, investors made a rational decision to accept negative real rates in the dollar (effectively paying a fee to hold short-term treasuries) over other currencies and asset classes.

It was the lesser of all evils at that particular moment and should not be conflated with ‘confidence’.

The other big reason for the dollar’s 2008 surge was that many of the world’s financial markets were leveraged to the hilt… in dollars. When Greenspan started slashing rates in 2001, investors around the world had been able to borrow cheap US dollars and park them in higher yielding assets abroad.

This global carry trade helped produce huge returns in emerging financial markets as investors borrowed four to six times their dollar equity at 2% to 8% and invested in China at 20%+.

When those markets began to melt down, however, the dollar loans needed to be repaid, and investors went rushing back into the dollar.

The dollar sat atop its altar for about six-months from September 2008 through March 2009, at which point risk tolerance reversed and the dollar began steadily losing ground again.

When European sovereign debt woes surfaced later that year (and in earnest in early 2010), the dollar surged once again… but that time it was a little different.

Sure, the dollar rallied against the euro and other European currencies… but gold rose as well. I remember writing about this last year, suggesting that the simultaneous rise in both the dollar and gold indicated the market’s changing attitude towards what it considered a ‘safe haven.’

Clearly the dollar was beginning to fall out of favor.

Fast forward to today. Mubarak. Gaddafi. Khalifa. Al Said. Ben Ali. Etc. There is no shortage of turmoil right now… yet we are seeing the dollar get clobbered while gold, silver, and smaller currencies like the Swiss franc rise. This represents a major shift in the way that the market views risk.

It’s true that nothing goes up or down in a straight line… but long term, the market is telling us that investors are washing their hands of the dollar as a safe haven asset.

So what happens from here?

In the long run, the law of one price will prevail; the US dollar cannot become so cheap relative to other currencies that a multimillion dollar home in Malibu only costs the equivalent of six month’s wages in Switzerland… or that a new Corvette equals the price of an electric bicycle in Singapore.

Foreigners will swoop in and mop up US inventory long before that happens, not to mention foreign governments will manipulate their own currencies in order to avoid missing out on a 300 million-strong consumer market.

We’re already seeing this now as the ridiculous game of international capital controls tries to masquerade as a free market. I suspect the regulatory environment will only worsen as the political lemmings follow one another off the cliffside.

(Yes, I know it’s a myth, but so is the notion of fiat currency as sound money…)

What about commodities? Investors looking for safe haven assets may opt for things like oil and wheat which have functional value… but I suspect that governments will step in long before we see $200 oil to set a ceiling price, or begin attacking speculators once again.

Ironically, this makes precious metals among the most attractive safe haven alternatives– the fact that they have no real functional value is a net positive.

As a caveat, I am not a gold bug, but the regular lamentations by the PM bears (gold is just a paper weight that has no function, you cannot eat gold, you cannot fill your gas tank with gold, there is no way to value gold, etc.) may turn out to be beneficial.

It is simply BECAUSE you cannot eat gold, cannot fill your gas tank with gold, etc. that governments will be more concerned about regulating high oil, wheat, and soy prices. If gold has no real benefit to the masses, the political consequences of high gold prices are less significant.

In other words, $20 wheat means blood in the streets. $2,000 gold only makes for pithy headlines, and its significance is easily dismissed when highly regarded sages like Warren Buffet dispute the notion of holding precious metals (nevermind he bought oodles of silver in the late 90s).

We’ll talk about this much more on this later, especially why the euro will likely fall first, and how the renimbi will continue to rise as an alternative reserve currency.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

Want more stuff like this?

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens. Click below to join our community of 100,000+ sovereign individuals.

Click here to receive our free intelligence

Comments on this entry are closed.

  • Jdha

    this crisis is in no way similar to a financial crisis, at least not at this stage, hence the USD weakness. Wait until there is a solvency and/or liquidity crisis and USD will strengthen.

    • sanity

      Bingo. Someone here is paying attention.

    • Bill

      You mean wait until some of the movers and shakers contrive a solvency crisis to try to stop the dollar dropping like a wet rock.

  • Scotty

    When the FED is the first, last and only buyer of US treasuries, disaster cannot be far behind.
    Simon – I do not agree with you that $2,000 gold is not significant. Record high gold prices is the canary in the coal mine that the dollar is toast.

  • Anon Cowherd

    So.. The dollar is finished, but the Euro will fall first?

  • houses and holes

    You look half right, SM. According to MacroBusiness, the crisis isn’t yet big enough to force a $US retrenchment. But if it does grow, it will.

  • Goldbug

    I just had a weird experience about an hour ago, wiring money from Bank of America to a gold dealer. I’m buying 15K in gold bullion from the dealer and they usually accept wires to pay.
    First, the assistant at the bank informed me that it would take several hours to go through, even though it’s going from one BofA branch to another BofA branch. This is because all wires must “go through the federal reserve” according to the assistant wiring the money. This I pretty much expected, even though it made my skin crawl a little. I can just see some fed official a year from now asking about the gold..
    But what really got me was what happened when the assistant came over to announce the wire was complete. He came over with the manager. She walked up, introduced herself, shook my hand, and started asking me how I liked my BofA service, and was there anything they could do to make it better, etc. She looked concerned. At the same time this young clown of an assistant was joking out loud…”hey what you gonna do with the gold? Let me know where you keep it, Ha Ha! Let me know where you bury it! etc.” Obviously they had read my wire…
    I got the feeling that the manager was told to keep an eye out for customers who pull money out to buy gold. My suggestion in the future if you wanna buy gold is to use cash!

    • Teleon7

      I had the same trouble today, at B of A. The Wire would not go through for that exact amount out of the country. They will try again in the morning

  • Joe_Neubarth

    The dollar was UP strongly against the Japanese Yen today.

  • Cburton

    Why wasn’t Nixon impeached for his most agregious crime, taking the dollar off the gold standard? Why hasn’t every president since Nixon been impeached for failing to return the buck to that Constitutionally required standard?

    • Bigbaldbob

      He was not impeached for taking the dollar off the gold standard (though perhaps he should have been). Tricky Dick was impeached for impeding (read: covering-up) the investigation into the Watergate break-in.

      • chowthen

        Nixon was not impeached, better study up on your history lesson. Nixon resigned. I think Clinton was the second if not the only president impeached by congress.

    • Knowurhistory

      It was FDR who got the ball rolling and took the U.S. off the gold standard: http://www.history.com/this-day-in-history/fdr-takes-united-states-off-gold-standard  (BTW, Nixon wasn’t impeached, he resigned before he was impeached.  Only two presidents have been impeached: Andrew Johnson and Bill Clinton. Both were acquitted at trial.)

  • Donald Lucas Cote

    My Jehovah’s Witnesses brothers have solid confidence that we are living in the End Times. I couldn’t agree with them more. Look at what’s happening around the world. Earthquakes (not just your normal ones), floods, volcanoes (a new one goes off every day now) & the manipulation of politicians and the financial money system. The Bible warns that money is the root of all evil. After all, money makes the world go round! He who owns the money supply theoretically owns you.

    Brothers and sisters, now is the time. Now is the time to repent. There is nothing wrong with hedging yourself against the second Greatest Depression (if you are currently reside in the U.S.) with gold & silver. I actually encourage every American to do so. We must always stick to morals and be on the lookout for deception. 2012 is but a front of End Times. Think about it.

    Until then, keep the faith growing.

    Donald Lucas Cote

    • sanity

      Wow. Put away the Meth. Pick up a history book, there were far worse times than this period, even in the past century.

      It’s a difficult economic time to be sure, but this is normal stuff that we see during a period of change. Perhaps the biggest real difference is media coverage and traders making knee-jerk reactions.

      • Mark

        Wow, you must have missed physce 101 and someone just wrote a piece on the “Normalcy Bias”, I think Steve Sujjergard. It says that when things have been the same for long time periods, people adopt the mindset things will always be the same. (Not True) A lot of Jewish business people stayed in Nazi Germany to their deaths believing Hitler would pass and things would return to the SAME. The point of the article I alluded to earlier was that this is not the SAME and will NEVER be. Our dollar has it’s days numbered (damn few) and a truck load of them won’t buy a gallon of gas when it finally happens. What Happens? In March, latest April they will seize your bank account and issue you credit against the new money. You WILL lose 75-90% of your wealth. This is not conspiracy theory bullshit. This info is a closely guarded secret that has finally leaked out. They are lying to the banks and telling them this day is just a day of adjustments. Believe me, it is not. The only change happening right this minute is the more the government sees this kind of information I am writing, the more it accelerates the date. So tell yourself it will be the SAME, let others who know tell the rest of us what the truth is. There are 258 predictions in the Bible, 256 happened right on the date specified, 257 and 258 are happening right before our eyes on TV every night. Repent? Yes repent.

      • Donald Lucas Cote

        Thanks for the support brother. I know of the coming ‘bank holiday’ but I didn’t expect it so soon. You said April?
        If you don’t mind hinting on who/where you got your info from I would greatly appreciate it. It’s times like these, like-minded people come together to give strength & spiritual sustenance.

        Have a power health day!

      • Ken

        WEll they better take the guns 1st. I think it would make Libya look like a small bump. D.C would really be on the map.

      • Donald Lucas Cote

        Relax sanity. All I’m saying is that in becoming bed-ridden for the past two years I’ve been able to gain an immense amount of insight to what and how this world works; movies, TV, music, newspapers, the money system, etc. !

        Sanity, what we’re seeing around the world (Tunisia, Libya, Latvia, Iceland, Thailand, London, Egypt, Bahrain & in our home country Wisconsin) is only the beginning. The world is fed up with our political leaders. We’ve had enough. Few people even know that the income tax is unconstitutional. That’s not even the tip of the iceberg!

        Do your homework. Watch your videos. Read your articles. Do not be another spoon-fed individual.

        Until then, keep an ‘open mind’

        Donald Lucas Cote

    • Stock Biltson

      The Bible says “The LOVE of money is the root of all evil.” Money is becoming electronic and eventially will be all electronic credits and debits. We will be given a number that all transactions we make will go through. This will be proposed as a cure for many of societies ills. No more robbery, no more theft, no more welfare cheating, no more illegal aliens, and etc. If you are wanted for breaking the law, the first time you go into a store to purchase something the authorities will know where you are within seconds, they will know where you’ve been etc. No one will be able to buy or sell without it. It will be a number marked on your right hand, and if you don’t have a right hand it will be on your forehead. If you don’t have a forehead….well.
      Coming Soon!

      • Anonymous

        The verse says “The love of money is the root of all KINDS of evil. . .” 1st Timothy 6:10 (NIV) The implication being that there are people out there that will do anything evil for money, but not that all things that are done for money are evil, nor that money itself is evil. If the biblical interpretation of money were that it is inherently evil then Jesus would not have used parables about earning money.

    • PT

      The Bible warns that money is the root of all evil.

      Actually it says the LOVE of money is the root of evil. Waaay different

    • Demovance

      No, the LOVE of money is the root of all evil.

  • Marc

    This is one of the more well written pieces that I have read in a while. Well done Simon.

  • http://www.stock-trading-pro-system-course.com The Market Trading Teacher

    Fully agree re the “law of one price”. The economy is too global for things to get much out-of-balance between large developed economies.

    As a Canadian, for example, I have no doubt in my mind that my government will manipulate the Canadian dollar to keep it from rising too high relative to the buying power of the US$. The US is Canada’s biggest trading partner and losing too much of that trade short term is politically unpalatable.

    So it will be that a strong Canadian dollar will be devalued for political gain & expedience.

    The “race for the bottom” is real, and as always hard assets will hold their relative values even as the paper they’re denominated in doesn’t.

    The average schmuck on the street, of course, will just see prices going up much faster than wages & won’t understand why, or why he/she can never seem to get ahead.

  • Davidnrobyn45

    HOWEVER–Silver is one of the most useful substances, having fewer applications than only petroleum, I’ve heard. Thankfully, the amounts consumed are very tiny, making the rise in price per unit small.

  • Grip

    I feel that you haven’t accounted for oil in this equation. The surging oil price caused by the middle east crisis is also a press on the dollar price?

  • Musicman

    Simon, thank you. You taught me something; Your writing and research is considerably more cerebral than many articles written on higher profile venues.

  • Gmacjr

    But gold is REAL Money……….Our dollars are fiat money and a NOTE……..
    GM

  • stilo

    I’m feeling pretty “pithy” right now myself…

  • stilo

    “The love of money is the root of all evil”

    That’s the love of “manna”, or all things related to the flesh. If you don’t love God first and foremost, you’ll do anything to get it. Francis Schaeffer said once, ‘if you start with things, you never will arrive at God, but if you start with God, it does tend to lead you to all other things’, philosophically speaking.

    God gives all other things their value. And gold, something that has almost an eternal quality, is a good analogy. And you can worship gold, or anything; a tree. Gold is better. God is best. No comparison. Our faith is more precious than gold that perishes. Faith in what?

    That’s “who” not what. The person is Jesus the Messiah.

    • Rs 45auto

      It is mammon not “manna”.

    • Donald Lucas Cote

      John 14:6 Jesus saith unto him, “I am the way, the truth, and the life: no man cometh unto the Father, but by me.”

    • io11341

      “So you think that money is the root of all evil?” said Francisco d’Aconia. “Have you ever asked what is the root of money? Money is a tool of exchange, which can’t exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?

      “Or did you say it’s the love of money that’s the root of all evil? To love a thing is to know and love its nature. To love money is to know and love the fact that money is the creation of the best power within you, and your passkey to trade your effort for the effort of the best among men. It’s the person who would sell his soul for a nickel, who is the loudest in proclaiming his hatred of money – and he has good reason to hate it. The lovers of money are willing to work for it. They know they are able to deserve it.

      “Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to be the tool by which men deal with one another, then men become the tools of men. Blood, whips and guns – or dollars. Take your choice – there is no other – and your time is running out.”

      • HL

        It appears you missed the point.

  • http://pulse.yahoo.com/_7L7TC42A7F5GCGGQXPATUCNUGA Mark

    I am looking to move outside the USA. I was wondering if it would be best to cash in my 401K and use it to buy assets in other country and set up a bank account in a country with the better currency? I know I will take a hit if I cash in my 401K.

    • MarthaUsztan

      Go to Costa Rica, There are alot of ex patrs here from US and Canada and military.
      Did all my research, Nicaragua, Mexico, Panama, etc.
      Costa has alot to offer, may different microclimates, democracy, mutlinationals coming in, people here spanish and like us, very peaceful. has growing pains but that is expected from a poor country coming of age.

  • stilo

    To Rs 45auto:

    Right O, mammon, “unrighteous mammon”. I didn’t mean to slight Moses.

  • http://www.stock-trading-pro-system-course.com Roy C.

    For heaven’s sakes fellas…

    There’s plenty of places on this big ol’ internet to have a theological debate…

    …places where it IS on-topic and IS the discussion.

    Here it’s off-topic and, in my personal opinion, a bit disrespectful to the blog author (& others) to load up the comments with a tangential, off-topic discussion of the vagaries of your (personal) belief system.

    Simon – I thank you for your posts and your valuable insights. I hope you enjoyed the tranquility of Tulum. When I resided in Playa del Carmen I used go to Tulum & Sian Ka’an (Punte Allen) on occasion to escape the day-to-day madness of the bigger Playa & Cancun.

    Respectfully,
    Roy C.

  • Alkymist

    Gold and silver are important commodities that help modern technology exist, gold is used in the manufacturing of semiconductors, like everything else will cause electronic prices to rise and people in the industry are worried about http://www.ebnonline.com/author.asp?section_id=1071&doc_id=203387
    Another not spoken of looming problem is a helium shortage, which is another key component in the manufacturing of many modern devices.
    http://www.independent.co.uk/news/science/take-a-deep-breath-why-the-world-is-running-out-of-helium-2059357.html
    The one thing everyone needs is clean drinking water, what everybody should have is at least 2 bags of pool shock calcium hypochlorite, one for personal use, the other bag to barter or sell by the teaspoon. 1 heaping teaspoon (about one-quarter of an ounce) of high-test (78%) granular calcium hypochlorite for each two gallons (eight liters) of water.

    Alkymist

    • Bill

      If the powers that be could be persuaded to stop suppressing cold fusion technology, we can have all the helium we want. And cheap energy produced at the neighborhood and local scale.

      But they’ve been fighting cheap energy technology for over a century now, no reason to expect they’re suddenly going to give up holding the human race in energy subjection for around a century now, no reason to think the worms are suddenly going to emerge from their chrysalis as anything but the same old maggots. Read up on JP Morgan’s destruction of Tesla and you’ll see what I mean.

    • Marthausztan

      very interesting, so are you saying that calcium hypochlorite will disinfect all water to make it safe for drinking? What about if the water has been infected with toxens by terrorists?

  • Glen2gs

    Let’s Rephrase it…”The True Evil is Lusting after Money and Power”

  • Marek

    ofcourse the homes value in the states will go down a lot.
    Very expensive homes will hold higher value.But average home price is going to go down.They have never had present valu any way. The value is unreal because of high taxes, inflated labour cost, inflated material cost and speculative real estate commission at every sale of the house.The value is not there.First of all majority of hauses are not owned by the people.There is no valu in them because they were never paid for.Phony bank money also never existed created by the banking system 9:1 ratio.All this is related to the national debt.The houses had never had the inflated value.The system is sick and can only last up to the point.This point has been reached by the US right now.

  • Trbarto

    All Fiat currencies eventually revert back to their original value – ZERO! I don’t know why so many want to dispute this – none has lasted the centuries. This is true even in this country – just look at the “continental”. What will make the dollar crash so huge for mankind is that fact that this empire (formerly “america”) was able to make its fiat currency the “reserve currency” for the world. Its the first time a fiat money ever backed other worthless pieces of paper making all other currencies derivatives of the dollar and the dollar a derivative of nothing (defined as the good faith and credit of the us people).

    We’ve been debasing it since the 1960s. The US will soon reap the whirlwind of its printing presses. It really has nothing to do with god or religion and as we all must eat, stay warm, an live, we all must play the money game – which means we must protect what we’ve earned (what ever weath we’ve earned). Because if you don’t – it will flow back to those who created it – bankers and as bankers already have plenty, I’d rather see my middle class counterparts keep whats theirs!

  • Harry Lane

    The paragraph on ‘foreigners swooping in and mop up US inventory’ seems to contradict the preceding paragraph (Malibu and Corvettes). Can someone clarify please. Thank you.

  • Ravenhead

    excuse my stupidity but what is a renimbi

    • http://www.stock-trading-pro-system-course.com The Trading System Teacher

      Rvenhead, the best explanation I’ve seen of Renminbi/Yuan yet, by the BBC:

      “Renminbi” is the official name of the currency introduced by the Communist People’s Republic of China at the time of its foundation in 1949. It means “the people’s currency”.

      “Yuan” is the name of a unit of the renminbi currency. Something may cost one yuan or 10 yuan. It would not be correct to say that it cost 10 renminbi.

      An analogy can be drawn with “pound sterling” (the official name of the British currency) and “pound” – a denomination of the pound sterling. Something may cost £1 or £10. It would not be correct to say that it cost 10 sterling.

      Nor can you talk about the number of renminbi – or the number of sterling – to the dollar.

  • http://www.facebook.com/people/Peter-S-Lewicki/1355468434 Peter S. Lewicki

    Excellent, except that silver has not been mentioned as an alternative to gold, especially since it has a huge price advantage and also enjoys the benefits of being both a precious metal and an industrial metal.

  • http://twitter.com/smytter Clarence Smith

    The comment on the relative value of silver seems very legitimate. Hopefully silver will gain acceptance as a gold ‘substitute’ very soon.

  • http://twitter.com/fundmanagernews Fund Manager News

    Right now there are probably the highest short positions against the dollar. When the tide turns, it could be a nasty short squeeze.

  • gman

    since 2/3 of the chinese economy is exports, oriented primarily towards the u.s. consumer market, just how can the yuan replace the dollar without itself collapsing first?

  • GamerFromJump

    I have a question for Simon. The notion of holding value in a tangible, fungible, non-replicable specie, like precious metals, makes sense to me. But I remember reading that one of the problems with the gold standard was manipulation by hoarding, such as was done by France. Can you give a little more background, and some explanation as to how a repeat might be avoided?

  • Quark

    Long term, all fiat currencies are doomed. Intermediate term, the dollar will continue to rally. Why?

    1. Because all the “experts” say it won’t. When everyone else is short, you should be long, but most people are unwilling to buck the crowd and conventional “wisdom”.
    2. No major currency is backed by anything but political hot air. As a result, currencies trade in relation to each other, and the dollar sucks less than the rest of them. Anyone who thinks the Euro is going to be stronger than the dollar is crazy or a fool.
    3. Those who believe in hyper-inflation may eventually be right, but they are wrong NOW. We are in the middle of a huge de-leveraging of debt, and that has ALWAYS been deflationary in all past instances.
    4. It is impossible to have hyper-inflation until the bond market no longer functions, and we’re years away from that point.

  • http://www.PeteSisco.com/ Pete Sisco

    That’s an astute point about the non-utility of gold. Politicians won’t clamor to control its price because the masses won’t be demanding it. But it’s critical to get your gold out of any country likely to be in panic mode when it’s obvious to the local Joe Average that a collapse is upon us.

Read previous post:
Q&A: Safety in Mexico and Offshore Banking

February 25, 2011 Tulum, Mexico I woke up this morning to the sound of waves crashing on the beach in...

Close