‘I need a dollar, dollar, a dollar is what I need,’
And so goes the current pop song.
Funnily enough, those lyrics were written while the American economy was enjoying its credit boom six years ago.
The dollar, buck, demand note, dead presidents club, the greenback, call it what you will. It’s the cash no one wants. In March this year, Ray Dalio founder of hedge fund Bridgewater Associates, said of the greenback, ‘It’s inevitable that the dollar’s role as the world’s currency will diminish from the dominant world currency to one of a few.’
The US Federal Reserve Bank is doing its best to destroy the value of America’s dollar. What are other countries doing to protect their currency reserves?
Last year, media outlets like The Age, Reuters, and Financial Times reported the big gold purchases from China and India.
But they aren’t the only countries on a gold-buying spree.
Many ‘emerging market’ countries are stocking up on their gold reserves.
Russia’s bought more than 118,000 ounces this year, bringing its total gold reserves to 27.61 million ounces. Russia’s gold reserves are now worth USD$43.7 billion. Just under half the value of what Russia has in US Treasury bond holdings.
Venezuela, a country with gross domestic product (GDP) of USD$340 billion, has increased its gold holdings by 10 tonnes over the past two years. It now has a healthy USD$16.9 billion worth of gold stashed away.
The Wall Street Journal reports that,‘…emerging-market central banks are moving into the gold market as buyers because of a lack of options available to diversify their reserves…’The big education we got from the economic crisis is that you have to diversify. And now that we are in exceptional times, [a lot of] countries… don’t have that many choices,’ said market analyst Eija Salavirta of the Bank of Finland.
But it’s not a case of countries diversifying. Have a look at this.
Belarus’s gold reserves are 42% of its total ‘currency’ reserves. Up from 16% two years ago. Cyprus has grown its gold stash to 54%, 10% higher than 2009.
And tiny Venezuela’s stock pile of the shiny stuff is 62% of its total currency reserves.
So, the media has made a fuss over China’s big 400 tonne purchase of gold. But it only bumped up its gold reserves a trivial 1.57%. And India? Its gold pile is 8.37% of its total currency reserves.
Emerging markets aren’t just increasing their exposure to other assets. They’re preparing themselves for a return to sound monetary policies.
Greg Canavan, editor of Sound Money Sound Investments shared his thoughts on the Federal Reserve Bank’s influence over the price of money.
‘Taking the ability to create and set the price of money out of their hands would be a giant step forward in improving the economic system,’ he says.
‘Going back to a modern type of gold standard would signal a return to sound money principles.’
The problem is we can’t just return to a gold standard. Tying one currency to the value of a precious metal isn’t the answer.
We need a new, modern gold standard.
A sound monetary policy isn’t something that will happen overnight.
Greg believes the first step is ensuring ‘…the gold market …[is] a “free” market.’
Enabling central bankers to determine a currency’s worth has to end. The power to value or devalue a currency belongs to market forces.
Greg tells his readers:
‘… [in] a free gold market, central banks must stop inflating the money supplies by buying their government’s debt and print money to buy gold instead. Doing so over a few years would help set a stable free-market price of gold and provide them [the central banks] with a sound asset on their balance sheet.’
‘National banknotes should promise to pay the bearer in gold. This way citizens have a recognised alternative to paper currency if they don’t like the way government [or] central banks [are] acting.
‘If inflationary policies were followed, people could take their notes to their bank and exchange it for gold. This would drain gold from the central bank and push its price up against the currency in question. It would therefore be a signal to central bankers to pull their heads in.’
Instead of being at the whim of central bankers, countries like Belarus and Venezuela are getting ready for the beginning of a sound global currency system.
P.S. – If other countries are seeing the warning signs and preparing for a change in monetary policy, maybe you should too. For the past two years, Greg Canavan has used what he calls ‘old-school fundamental analysis’ to identify sound-investment opportunities in today’s market. He looks for solid businesses that offer good value. And uses them to help his readers build investment portfolios that protect and grow their wealth.. Click here to find out more.
Are You Missing Out On Bargain Stocks?
By Greg Canavan
History has shown that buying stocks in times of fear and panic can yield good long-term results.
But today’s environment is a lot different to the one we were investing in five years ago. It’s a lot more volatile. A lot more macro driven. We’re in a post-credit-bubble-bust world – not a bull market. And you can’t just pick stocks out of a hat hoping they’ll go up.
The secret to investing soundly in this environment is to base your investments on sound principles. Some of the ones I follow in Sound Money. Sound Investments include…
- Value the business, not the share;
- Buy straw hats in winter;
- Always invest with a ‘margin of safety’;
- And keep a weather eye on the wider economic story.
A traditional value investor will tell you to focus on the fundamentals – cash flow, return on equity, assets and liabilities – and that news flow is meaningless noise.
But I’m convinced you need to look at the wider economic picture, too. Like now for instance…
I’ve been telling my readers since 2010 to hold cash so we can take advantage when value opportunities present themselves. And as this market falls, opportunities are presenting themselves.
That’s why cash is great to hold in an overvalued market. It puts you in a position to take advantage of good prices when they come. The further the market falls, the less useful cash becomes. Because the potential return from investing in quality businesses with strong returns on capital starts to outweigh the benefits of cash.
Some companies look cheap right now based on their profit expectations for 2012. But those figures will be revised. And this market will continue to be tough. There will be plenty of people who never saw any sort of slowdown coming that will tell you, ‘Now is the time to buy’ and ‘Stocks are set to soar’. But the reality is we are in a bear market.
Your aim should be to buy opportunistically. Do not chase the rallies. Only invest in stocks trading at a discount to value that value a margin of safety. Take advantage of the market’s emotions but don’t let it take advantage of yours.