–At the rate the US dollar is declining, Australia may have to start getting ready for currency refugees from America (other than your editor). There’s no debt deal in America yet. As you can see from the chart below, the US dollar index is nearing a 12-month low. And the 10-day moving average (the blue line) has crossed under the 35-day average (the red line). Our in-house trader Murray Dawes tells us that when this happens, it’s a short-term bearish indicator. Hmm.
–The dollar index isn’t at new lows. And the greenback is still the world’s most widely owned reserve currency. According to Bloomberg, 60.7% of global currency reserves are held in dollars. The Euro—the other sick man of currencies—is second at 26.6%, followed by the Yen. What about Australia?
–Well, the interesting thing about the Bloomberg story is that so-called commodity currencies like the Australian, Canadian, and New Zealand dollars are gaining popularity as reserve currencies even as they “de-couple” from commodities. What exactly is going on here?
–The “commodity currencies” have been popular for a couple of reasons. The yields on them, or what you’d get from bank interest, are high. The yields are high because GDP growth in the commodity-producing countries is high and central banks have kept short-term interest rates higher to combat inflation (see the Aussie figures today, for example). And finally, the high GDP growth in the commodity producers has been driven by the huge demand for commodities in Asia and China.
–Given all that, it’s still hard to imagine that commodity currencies could become reserve currencies. China’s growth is also a function of credit expansion. Take away the expansion, and the long chain of events leading to strong commodity currencies is broken. And the currencies will fall. But will they?
–The current strength of the commodity currencies is the flip side to how awful the euro and the dollar are. Investors seem happy to take any port in a storm, particularly if it’s yielding over 4%. But investors are sea-faring and fickle. They go where money is treated best and are not inherently loyal. Which is another way of saying the Aussie will only stay strong as long as people want to own it. And as soon as investors see a better deal, they’ll take it.
–The key technical level to watch in this currency drama is just above 70 on the dollar index. A break below that would tell you that the faith global investors have in the credit of the United States of America has been weakened by the argument over the debt ceiling. We wouldn’t expect a sudden dollar crash. But we’d expect a chronically weaker dollar whose centrality in the global currency reserve system has ended.
–Keep in mind, though, that the big up and down moves in the dollar index that you see on the chart above had corresponding up and down moves in the Aussie dollar. The Aussie is just paper money too. And even though it may be relatively better than the greenback at the moment, it is absolutely not gold or silver, which are real money.
–It’s been a while since we hit the reader mail bag. So let’s have a look.
Thanks for your lucid and penetrating analyses.
Firstly, but irrelevantly, the US empire is the continuation of the British Empire, not a newby.
Secondly and relevantly, if the US retreats, get ready to be part of the Chinese (formerly Mongol) or Russian (a bit Carthaginian) empires.
The EU is a ridiculous fantasy that will be easily consumed by Islam or Russia.
Australia is, (as Paul Keating prophesied) an Anglo pond left behind by the ebbing tide of British Empire. Our only hope is to marry more Asians and assimilate gradually and placidly.
–As the Borg say, you will be assimilated. But keep resisting. Meanwhile…
I am surprised that you guys have not provided more of an expose on the Labor legislation to allow our banks to issue covered bonds so they can avail themselves of “OUR” savings as a guarantee of their bond issues. I really enjoy having the bastards relegating my right to my money to second rate status. NOT! Why are not more people aggrieved by this tactic to allow banks, who are overly exposed to a potential mortgage impairment storm, to access easy credit at our expense. Perhaps they got the government they truly deserve. Time to buy a safe for home.
You guys have said previously that the main problem with the markets to be corrected at some time in the near future is the abundance of cheap easy credit.
I wonder how much of the cheap and easy credit has made its way into Gold and Silver prices particularly Spot prices I suppose.
When it gets switched off, or tightened up, how much are prices likely to fall?
Could easily be 20% couldn’t it?
–The futures exchanges have been trying to wring the speculators out of the market by raising margin requirements, especially on silver. But we won’t really find out how many speculators are in the market until there’s a major “credit event”. Keep in mind that to the extent the credit event weakens currencies, it ought to be bullish for precious metals. But there’s no way to be certain. In any event, it’s always better to buy on weakness if you can.
–Lots of mail on shale gas and our Revolution in the Desert video. There are too many letters to print, in fact. But here is a sampling of some of them.
Hi Just wanted you to know that I have cancelled my subscription due to your attitude to coal seem gas mining [sic]. Some things are just more important than money, mining and even the economy. I know it has been said before but you can’t eat money, you can’t even eat gas or oil.
–There are many things more important than money. Money is just a means to an end. And the ends are as different as the people pursuing them. Our goal is to help people gain or add to their financial independence, regardless of what their ultimate ambitions are. Having money gives you some freedom and independence from the vagaries of life and the predations of government. It doesn’t necessarily make you happier or improve your quality of life. That’s up to you, the people you love, the books you read, the places you visit, the music you dance to, and the wine you drink.
–And of course you can’t eat money or oil and gas. Have you ever been able to eat money? But if you’re suggesting that the shale gas industry is in conflict with food security, you’re simply wrong. Australia is not going to plough under its crops in order to export all of its energy so that it can starve in the cold dark night. There’s a very open and public debate going on right now over how best to use land and resources. Contributing to that debate with clichés isn’t much of a contribution.
–Besides, how do you think food gets on your plate? It usually comes from a store. And it got there on a truck that came from a farm. That truck isn’t fuelled by good wishes or vague thoughts. It runs on petrol. That petrol has to come from somewhere. The world needs energy. And we can get it without destroying our farm land. You’re presenting a false choice. But you’re not the only one.
This [shale gas] is one of the most disturbing things, as it takes over productive farm land, pollutes the water table destroys lives for what I ask. Surely people are more evolved and can implement better ways. We have the knowledge to do so much better, but no greed for the few with total disregard and respect for life for short term gain seems to always win. When will people wake up and act with wisdom, sadly perhaps not until everything is destroyed.
–There were quite a few readers who posed this same sentiment, that what we face is a choice between greed and profit on the one hand, and wisdom and life on the other hand. That’s an absurd way to frame the argument. It suggests that anyone involved in extractive industries is engaged in the deliberate destruction of the planet for personal gain.
–For thousands of years, men have been engaged in turning raw materials into goods, services, tools, and a better quality of life. There are useful and productive ways to do it and there are wasteful and unproductive ways to do it. The ability to make a profit—to provide people what they need and want at a price they are willing to pay—is what drives this whole process.
–Profit is a kind of feedback that allows you to pursue your interests while providing people with things they find valuable, useful, or pleasurable. Profit is also a kind of personal gain which allows for self-improvement and the ability to make your life better for you and your family. It’s strange that at some point people began to see this as evil or selfish. It’s true that profit doesn’t make you a better person or guarantee that you’ll make better choices (or choices that other people approve of). But it’s a weird world we live in where the enterprising individual seeking to improve his station in life is viewed as greedy.
— It is not greed that drives the production of scarce resources. It’s the expectation of profit. Profit is not evil. It’s what allows the division of labour and specialisation, the very things that provide people with so many choices and so much abundance. How is the baker able to bake his bread if he can’t afford flour, eggs, or an oven? Is it reckless greed that dries the baker? Or the desire to earn a living and make a life?
–Profit is the reward given to anyone who takes resources and adds value to them through his labour or his ideas. You can argue about profit that doesn’t seem hard earned (like bank profits). But to say that producing energy for the modern world is about greed, profits for the few, and the wilful destruction of the natural world is not a serious argument. But if you think you can “implement better ways”, then by all means let us know what they are. You can send a note to firstname.lastname@example.org
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