Dollar to strengthen in a global market downturn and then collapse?
Posted on 16 January 2011 with 1 comment from readers
Many readers of ArabianMoney would like to know where the dollar is heading, who would n’t? All investors have to take a view on the dollar, whether they like it or not. Even somebody with a UAE dirham deposit account is speculating on the value of the dollar as the emirati currency is directly pegged to the dollar.
Our best guess – and last week the dollar went in the opposite direction on a rally in euro confidence (something we have seen happen many times in recent months and always with ultimate disappointment) – is that the dollar will strengthen in some sort of a global financial correction or crash over the next few months, and then blow-up.
Emerging market correction
The Indian and Chinese stock markets are falling. Bangladesh and Indonesia have seen minor crashes. UAE stock market confidence is weakening (click here). There seems evidence that the widely predicted emerging markets rally in 2011 is not going to happen, or at least not until after a substantial correction. Marc Faber predicted a 20-30 per cent emerging markets correction recently (click here).
Will the major stock markets roll over too, after a not very strong New Year rally? There are plenty of over-bought indicators flashing red but then they have for a year! Is the length of the rally a cause for complacency or concern?
That said when stock markets fall over the US dollar will rally, and even the much maligned US T-bonds will have a last gasp of life. However, what the wise old men like Jim Rogers, Gerald Celente and Marc Faber have been warning is that this will be the moment to get out of dollars and into hard assets.
Selling gold and silver
For gold and silver will be sold in any major financial market dislocation. We saw this in 2008-9. Perhaps this has actually just started to happen – gold prices are at their weakest for eight weeks and silver is $3 off its recent high. As precious metals and stocks fall in value the dollar will rally as both hard and paper assets are exchanged for the world’s reserve currency.
But most investors still do not seem to understand the flawed nature of the US dollar with trillions sat on the sidelines waiting for a cue to invest. That may come after a big market sell-off and all that money entering the financial markets of the world in search of bargains will chase up the value of assets in a monstrous inflation.
In the process the dollar will be devalued as it will buy less and therefore be worth less. How much less is very hard to tell. Some doyens of alternative investment have the dollar collapsing completely and a new currency being issued to replace it, others an inflation like the 70s. Neither is a very good argument for holding the dollar beyond the next financial crisis.
We will be exploring new investment strategies to beat the coming collapse of the US dollar in the next edition of the ArabianMoney investment newsletter (click here to sign-up). But then the US dollar has not been a very good long-term hold for many years:
1 Comment posted by readers:
Without a doubt, the USD is not a good long term investment.
USD investors should seriously consider the fact that the US politicians will never be able to extricate the US government from the massive and growing debt burden it has. For this reason, the USD, if it “survives” the next 10 years (which I don’t believe it can!), in 2020, it will be less than one-quarter of its current worth, in purchasing power.
A far more likely scenario, as this website has suggested, is a major global financial crisis, where the general public loses confidence in some of the world’s major fiat currencies (especially the USD, the Euro, and the Yen). It is this “total loss of confidence” that must then be followed by the introduction of new fiat currencies that are designed to “calm the masses”.