A story about the fading dollar and the rise of precious metals
The Dollar Brand
The US dollar is a sort of monetary or currency brand, and like any other brand, it can fall out of favor. Even iconic brands can lose their ‘must-have’ standing. Remember the Members Only jackets from the 1980s?”
So it is with the U.S. dollar, a brand making lows in the financial markets. It is a brand past its apex and a replacement waits in the wings. This line of thought comes from James Grant, who presented the idea of the dollar as a flagging brand at Grant’s Fall Investment Conference in Manhattan.
Grant dug up the example of the Deutsche Mark, or DM. ‚ÄúThe DM was a hallowed monetary brand, a source of stability and a symbol of Teutonic fiscal restraint. As recently as the end of 1991, the DM made up 18% of world currency reserves. It was the quintessential strong currency.” At that point, according to historian David Marsh, the DM held sway ‚Äòacross a larger area of Europe than any other German Reich in history. Today, the DM does not exist. Look at the status of the once Almighty British Pound. Not even a glimmer of its former power and influence.
Is the dollar next?”
With this backdrop, it is not hard to imagine the U.S. dollar losing its dominance. It is especially not hard to imagine when you consider the poor stewardship of the U.S. government. The government seems as intent on creating dollars as bunnies are on creating other bunnies.
Tuesday‚Äôs sudden loss of confidence in the U.S. dollar sparked a fire in about every other asset class. Gold was the most notable, soaring to a new record high of $1,043 an ounce — though you‚Äôd be hard-pressed to find an ounce of gold anywhere that cheap. The spot price climbed up to just below $1,050 early Wednesday morning.
Silver’s been off to the races this week too. Up a buck since Monday, the spot price is at about $17.40 today. In percentage terms, that’s about 6%, actually outperforming gold’s 4% rise this week. In addition the gold-to-silver ratio remains around 60, the same level as last month. Silver looked like a bargain then, and still $4 bucks below its credit crisis high, it still does today.
“The ‘poor man’s gold’ has come under fire in recent years that it just doesn’t deserve ‘precious metal’ status. 50% of the metal that’s mined every year goes into industrial uses, which leads many to think it should be considered a base metal. This week’s $1 pop absolutely shows it as a dollar hedge. I recommend that you hedge your dollar holdings with silver at your earliest convenience. The dollar’s ruling days are numbered.
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the DM became the valuation point of the Euro, even after the re-uniting misery with east Germany. So I agree with Gustav.
What intrigues me more is that every economist in the US keeps pointing at the Euro being way to overvalued seeing the leveraging that was used in the monetery system. Yet is is very apparent that the Euro still has some decent life and actually looks like it is stabilizing with some confined “bad spots”. Guess I have to dive a bit more into that to find out what is the true reason for a further strenghtening of the euro.
As my name already implies, my ancestry lies in Germany. I think the example of the German Mark or Deutsch Mark in your exposé is not painting an exact picture.
The only reason why the German Mark disappeared as a brandname was because of the European Union's effort to create one currency. If not for Germany (at that point reunited East and West) there would not have been a common market currency like the Euro. The Dutch Guilder, the French Franc, the Italian Lire, the Belgian Franc, all well established monetary brands, became part of history as a result of the Euro. The British Pound however much more reflects the general truth of your story, even though it's still in circulation.
Well there is a lot more to the misinterpretation of US economists on the “over valuation” of the Euro. Because of the governmental structure of the Eurozone, it is much easier for some of the participant countries to evaluate their strength and weaknesses versus other Eurozone participants. For example minimum wage between France and Lithuania or the Netherlands and Spain is substantially different. So companies can actually outsource production within the Eurozone and accomplish a better bottomline. This re-alignment process is in full force in the European Union on many manufacturing and Service levels. This has a strong positive influence on the valuation of the Euro.
My econ professor a long time ago claimed that I would be stupid to try and produce top quality wines in Holland or Scandinavia if you have perfect soil and sun in Southern France, parts of Spain and Italy. In return I would be in efficient to try and produce sugar beets, rich milk and dairy or even eggs in countries with lower water supply, green grass and rich soil.
That is pretty much what the European economy is based on: finding the best spot for the best wage and the best natural environment. It's a different paradigm.