There’s a major trend that could have a devastating impact on the US dollar.
What’s shocking is that I haven’t come across a single other financial analyst who has fully grasped the implications of it.
This is crazy, given that it will affect anyone who owns dollar-denominated investments, whether it’s gold, international shares or commodities. In fact, even if you aren’t directly invested in them, there is very good chance your pension fund is.
That’s how big this is.
The thing is, though, you can turn this trend to your advantage, as we’ll see in a moment.
I’m talking about the planned creation of a single common currency in the Gulf States. A new monetary union just like the eurozone, but for oil rich countries.
That might not sound like a big deal. After all, who really cares what a bunch of Arab countries are doing with their currencies?
But this is going to have a colossal impact on the world economy. Let me explain…
Last Friday, I explained why the dollar’s long-term value is under threat as the US economy falters. But now let me show you the threat to the dollar that the rest of the world still hasn’t picked-up on…
The great petrodollar merry-go-round is about to break down
You see, right now the dollar receives a huge amount of support from being the standard currency for international trade. The international oil trade is a big part of that. Oil is priced in dollars on the international market. It is bought and sold in dollars.
What that basically means is that countries that want to buy oil need to have dollars. Countries that sell it are left holding dollars. That fuels global demand for the American currency. It props up its value…
Right now, the only major producer that sells in a different currency is Iran. They take their payments in euros and Japanese yen. But it is the Gulf Arab states like Saudi, Kuwait and the UAE that are at the heart of the global oil trade.
But now think of a situation where global oil production is increasingly concentrated in the hands of the Gulf Arab countries. And, as I explained in a recent special report, that is what is going to happen as non-OPEC production collapses.
Now consider what the impact on the dollar is going to be when those countries say they don’t want to be paid in dollars anymore. Once they’ve got a common currency you can bet they are going to price their oil in it. They will want to be paid in Dirhams or Dinars or whatever else it is that they eventually name it.
That is going to short circuit global demand for the dollar. Because oil importing countries won’t need to buy dollars to pay for their oil anymore. The Gulf countries won’t be left holding huge reserves of dollars which they then have to recycle into the US…
Right now the oil-exporting countries are the second-biggest holders of US government debt after China. That’s because they get paid for their oil in US dollars. A lot of that money then gets reinvested in US dollar-denominated assets. But if they aren’t being paid in dollars anymore, they won’t have to recycle them by investing in US government bonds. International demand for the dollar is going to plunge. And the value of the dollar is going to plunge with it.
Two years to D-Day?
The Gulf Co-operation Council (GCC) states have been talking about this for a long time. And they signed the first concrete agreements to implement it last September. Since then they have been moving ahead with their plans. By the end of this year, they should have a monetary council in place. This will be a precursor to the Gulf central bank. And it will decide on the name and value of the currency.
They had planned to have their new currency in place by 2010. I doubt they will manage it that quickly though. The way I see it, the impact of the financial crisis will force them to push it back by about a year.
But there is absolutely no doubt about it – the Gulf common currency is now on its way. And when it happens it is going to kick the legs out from under the dollar.
As I said though, there are ways that you could profit from this. An obvious trade is to go short on the dollar. There are listed funds that allow you to do that. And again, not all dollar-denominated assets will lose out. Whilst the value of US shares, for example, is going to be eroded, the value of certain dollar-denominated commodities like oil and gold rises as the dollar weakens.
Kind regards,
Manraaj Singh
For The Right Side
Editor’s recommendation: Manraaj Singh is Chief Investment Strategist at Profit Hunter. As he explains, when the dollar falls, oil goes up. Click here to receive his latest smart way to play the “oil rebound”.
MARKET NOTES
UK housing market: Not on the rebound
According to Nationwide, we’ve had our first rise in house prices for 16 months. The mainstream media leapt onto this 0.9% increase, with some questioning whether this means prices are finally bottoming out.
The simple answer is no.
First of all, monthly house price changes are volatile and unreliable. You’d be better off looking at quarterly figures.
Second, just look at the chart below. It follows real house prices (adjusted for retail price inflation, blue line), from 1975 to early 2009. The red line represents the long-term trend of 2.9% average annual growth. Average real house prices are currently right on that trend line…
You can also see that house prices have a tendency to over-shoot in a boom and under-shoot in a bust.
The faster they rise, the harder they fall
Back in the early 1990s, a period of strong economic growth with a correlated housing boom eventually gave way to the collapse in house prices (red box). No one wanted to borrow at sky-high interest rates and house prices fell 30% from the peak.
This time around, we may have near-zero interest rates, but lending is painfully tight. That means there is still not much chance of sustained demand for houses. Also, with unemployment on the up, repossessions are likely to keep rising – meaning there’ll be plenty of supply.
The latest monthly house price rise looks like a sucker’s rally. Brace yourself…
The Daily Reckoning – How to put the “Great” into a Depression
BY BILL BONNER
London, England
Friday, 3 April 2009
In London, last night...
“You weren’t here today,” began the cab driver. “You missed the excitement. You know, the G20 meeting. They held it here in London...
“Some lads got out of control. They smashed a window over at the Royal Bank of Scotland and then broke up the computers and so forth.
“Nothing very important...
“But the media made a big thing of it. They kept talking about that G20 meeting as if they were going to change the whole world. New World Order and all that... but what could they change? These hotshots at the banks took some bad bets. Now they’ve got to pay for them. What’s all the fuss about?”
Clearly, our cab driver should go back to school. He could study macro-economics and learn about counter-cyclical fiscal stimulus, the multiplier effect and the need to restore liquidity to the financial sector. Then, he could be spouting the same claptrap as other commentators.
He could get on board with the plans to save capitalism from... well, from capitalism! It’s all very well for the capitalists to make money, he will discover, but when they begin to lose it, well government has to step in and bail them out. The “creative” part of capitalism is fine, but spare us the destruction, okay.
Yesterday, the heads of state of the world’s 20 leading countries decided to put more muscle into their efforts to stop capitalism’s downswing. Notably, they decided to treble the budget of the IMF. In all, today’s International Herald Tribune tells us it’s a “One Trillion Dollar Deal.”
Gordon Brown pronounced it a “New World Order,” which sounds a lot like what George Bush was aiming for 15 years ago. One world government. One multi-national police force. Harmonized tax collection. (No more tax havens... nowhere to run... nowhere to hide... ) Keep the masses happy with bread and circuses and “wars” against imaginary and unnecessary enemies.
Hey, maybe we’ll all have to speak Esperanto too...
But, at least now the IMF will be about to bailout more bankrupt governments before it goes broke itself.
Most of the money is coming from a country that doesn’t have any – the USA.
Look up. What do you see? Why, it’s our Dollar Crash flag. The dollar’s days are numbered. What’s the number? We don’t know. But whatever it was a week ago, it’s a smaller number now.
Yesterday, the dollar gave up a little ground. The euro rose to $1.24. Oil went up to $52. Gold, however, fell hard – down to $904. Gold stocks, on the other hand, did rather well.
[Editor’s note: Dollar down, oil up? Here’s a way you could profit from both these trends.]
Hugo Chavez was in the Mideast this week at a meeting of oil producers. He called for a new petro-currency... which, we suppose, is a currency backed by oil. The Associated Press:
DOHA, Qatar (AP) - Venezuelan President Hugo Chavez sought Arab support Tuesday for a proposed oil-backed currency to challenge the U.S. dollar in his latest swipe at Washington's dominance in global financial affairs.
He probably won’t get very far with that. But he’s not the only one looking for a solution to a crisis that hasn’t happened yet.
The dollar’s been king of the monetary mountain for a long time. But it had better be careful... watch its back ... give a little of the food to a dog before eating it itself. Rivals are plotting against it...
Read on…
To read the Daily Reckoning in full, click here.
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