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Prepare for Panic Buying in the World's Most Despised AssetBy Jeff ClarkThursday, September 24, 2009 Evolution takes a long time.
Scientists figure it took about 5 million years for Australopithecus to lift his shoulders, raise his head, and lose enough back hair to evolve into the modern man. Who knows what is in store for our species over the next 5 million years? The only certain thing is none of us will be around to see it.
Currency markets, on the other hand, evolve much faster. It only took a few short centuries to go from using beaver pelts and shiny beads as currency to using dollar bills. So while we may not witness the next transformation of the hairy back during our lifetimes, we'll almost certainly get to see changes in the greenback.
But even those changes will take a lot longer than most people seem to be expecting.
There's no doubt the dollar will eventually be dethroned as the world's reserve currency. The misguided policies of the Federal Reserve guarantee it. But who will be the new king?
The euro? Not likely. European Central Bankers are performing the same bone-headed stunts as our own Ben Bernanke.
How about the Chinese yuan? That seems like a reasonable bet. After all, China is rapidly taking over the world. But China doesn't want the currency crown – not yet anyway. The yuan is pegged to the dollar, and that's beneficial to its trade policies. And China owns so many of the greenbacks, it's likely to defend the dollar against an overthrow until it can convert its bank account into something more tangible, like U.S. companies and real estate.
The obvious choice, of course, is gold. Gold is real money. It's a long-held store of value that can't be reproduced merely by running a printing press.
But you can't take a few slivers of the shiny yellow metal down to the grocery store and buy a gallon of milk or a carton of eggs. That's true in the U.S. and it's true in just about every country across the globe.
You can buy just about anything, anywhere, with dollars.
Gold is real money, but it's not real currency. And until that transition happens, stories of the dollar's death are greatly exaggerated – especially this week.
You see, we have the G-20 meeting to look forward to today and tomorrow. The "Group of 20" finance ministers and central-bank governors from various industrialized and developing countries has gotten together in Pittsburgh to discuss key issues in the global economy.
Once they get done congratulating themselves for averting the financial crisis of last year, they're likely to turn their attention to the U.S. dollar. Many G-20 countries rely on exports to the United States to help fuel their economies. A weak dollar makes their goods more expensive for Americans and it puts a damper on demand.
They probably won't do anything constructive. But any comments viewed as "dollar supportive" may be enough to spook the currency markets and rally the dollar. After all, with a Daily Sentiment Index reading of 97% bearish, there's plenty of potential for a short-covering rally.
If you've seen what a little short-covering panic has done to shares in worthless companies like American International Group (AIG), Fannie Mae (FNM), and Freddie Mac (FRE), then just imagine what could happen to the world's most despised currency.
The above-mentioned stocks, just like the U.S. dollar, will eventually be worthless. But that hasn't kept them from rallying sharply over the past month.
The dollar now looks poised to do the same.
Best regards and good trading,
Jeff Clark
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Financial giants surging... Goldman, BlackRock, Morgan Stanley, Credit Suisse make fresh highs.
Oil suffers giant hit yesterday... spot prices decline below $68.50.
Foreign wireless stocks climb... Vodafone (Europe), Turkcell (Turkey), Vivo Participacoes (Brazil) join the new highs list.
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