This week has been punctuated by lots of anti-Dollar sentiment, and the market has been somewhat uneasy. The first was the Chinese gold fix, with gold bulls and precious metal dealers everywhere proclaiming that “the Dollar is dead!”
This is the typical response from the gold dealers, many of whom, are stakeholders in anti-Dollar sentiment. Some of this derives from the roughly inverse relationship exhibited between the US Dollar and commodities in general and some of it stems from wishful thinking. For some reason, gold dealers would rather see the global economy collapse so they could laud their wealth* over everyone, than pursue more timely market opportunities.
Regardless, according to the deputy governor of the People’s Bank of China, “the Shanghai gold benchmark will provide a fair and tradable yuan-denominated gold fix price [and] will help improve Yuan pricing mechanism and promote internationalization of the Chinese gold market.”
The fix may indeed have market consequences in the short-run, allowing Chinese (and select financial institutions) to exert market power in the precious metal market space, and it may indeed have more substantial consequences in the longer term (five or more years away), but to assume this will be the end of the US Dollar is quite naive.
And in other news…
Saudi Arabia has threatened to dump approximately 750 billion US Dollars worth of their US Treasuries. This move highlights the plight of an increasingly desperate and isolated country. In addition to the regime being publicly blamed for funding Al-Qaeda, there has been a general ramp up of hostility against the regime in Western media on account of the spread of Wahhabism, Iran (their regional nemesis) being given a seat at the international table and unrest on the borders of the kingdom.
This would be a very silly, and desperate move, not only would they stand to lose money if they dumped such a large order on the market in one go, but there are even questions as to whether the kingdom actually has 750 billion US in Treasuries to sell. Of course, very few people are in a position to say.
Barack Obama visited Saudi Arabia earlier this week, so while the threat cannot be considered to be entirely idle, it still amounts to kicking over the chess-board in frustration, and thus, is more likely to be utilized as a bargaining chip, rather than being a legitimate policy consideration. This is a regime flexing its muscle and pointing out that it is relevant still, nothing more.
A Dollar collapse really is unthinkable..
If the US Dollar collapsed tomorrow, the world would be different overnight. It is unthinkable to the Chinese, to the Saudis, to the Europeans. In fact, it would herald a new dark-age for humanity.
Not only would we lose the deepest and most mature of the global capital markets, but all of these regimes have assets invested in the US. Call me a skeptic, but it is more likely we will get a reformed (and more equitable) global reserve regime after the markets have punished various national participants. We need change, but not the sort of change that would send us back to the 1700s in terms of economic development.
*Just to be clear, precious metals should comprise a portion of any portfolio these days, as a hedge against the unthinkable, but the “100% precious metals, living in a bunker in the woods” type strategy is probably 25-50 years too early at a minimum.