The real change to watch out for

October 4, 2013
Santiago, Chile

It takes a lot of courage to go against the crowd.

Whether in investing, or acknowledging that your country is heading towards an epic fiscal crisis, it isn’t easy to stand alone… especially when everyone else is betting the other way.

Have you ever noticed, for example, that investors are often only interested in buying some stock or asset when its price is going up?

It’s as if a rising stock price is somehow validation that everyone else thinks it’s a good investment too.

Of course, these types of situations often make the worst investments. If you buy when everyone else is piling in, you could very well be the last sucker to enter a crowded room before the music stops.

The opposite is also true. When an investment has cratered and the price has fallen through the floor, nobody really wants to buy.

Realistically, the opposite should be true. And gold is an interesting example of this.

After more than a decade of positive returns, many investors have abandoned their precious metals positions. The conventional wisdom says that gold is ‘finished’. After all, the dollar price is falling… so it must be a bad ‘investment’.

Others, however, are looking at where gold is right now, where it probably will be a few years from now, and thinking that it’s a hell of a bargain.

Azerbaijan’s State Oil Fund (SOFAZ) is in this group. The fund recently announced that they were increasing their gold holdings by 33% over the next year.

This is a big move for the $35 billion fund, and they join other sovereign wealth funds from Qatar to China, plus central banks in places like Turkey, Russia, Mongolia, and Kazakhstan, who are increasing their gold holdings.

This is a significant trend that is unfolding.

Right now, the United States is in a privileged position because of the dollar’s status as the primary reserve currency. Mr. Bernanke can print trillions of dollars, then export much of that new money overseas.

Few other nations would be able to get away with this. In Argentina, for example, the government has engaged in similar wanton monetary inflation.

But Argentine pesos are not accepted anywhere else in the world. All of those pesos remain at home… and this has created debilitating inflation bordering on a currency crisis.

The US gets to spread its dollars all over the world, thus pushing the negative inflationary effects onto foreign nations. From Sri Lanka to Botswana to Ukraine to Cambodia, I’ve seen it first hand with my own eyes.

Foreign nations have long trusted the United States to maintain a sound dollar. But for decades, and especially over the last several years, America has abused this privileged trust.

That’s why it’s coming to an end. It’s absurd to think that the rest of the world will just lay down and suffer, indefinitely, so that Americans can keep buying McMansions, flat screen TVs, and cruise missiles.

Everywhere you look there are signs of this happening.

Russia has recently agreed to sell oil to the Chinese, accepting renminbi as payment. Fortune 500 companies from McDonalds to Morgan Stanley have issued bonds denominated in Chinese renminbi. Even the London Stock Exchange now has a thriving renminbi bond business.

The gold story in Azerbaijan is just one more brick in the wall. But it underscores this growing theme of the end of the US dollar’s dominance– one of the most critical trends in the world today.

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