Why the US Dollar Will Destroy the World

With the world focused on the European banking crisis, the other side of the Atlantic isn’t looking much better.

Like every country in the world, the United States is bankrupt. Yet it should be the last domino to fall. Being the heaviest domino, the US — the world’s largest economy — needs the weight of the other dominoes to crash and bring it down. That will happen when the sovereign debt crisis turns global.

When the global debt crisis heats up in the months ahead, capital will flock into the US dollar — the world’s reserve currency. Legendary commodities investor Jim Rogers told The Economic Times,

I own the US dollar. It is my largest single currency. I do not have any confidence in the US dollar as a sound currency. It is one of the most flawed currencies in the world. The US is the largest debtor nation in world history and it is getting even worse. I own it because there is more turmoil coming in the world and in such times, people seek a safe haven.

The king of commodities is spon on. The US dollar is about to enter a prolific bull market. There’s really nowhere else for institutions to put their money. When this happens, the world economy will crash. Of course, there’s always a way to survive and prosper.

I’ll explain…

The US dollar to skyrocket

To start, let’s review the US dollar index — a basket of currencies weighted against the US dollar. Here’s a look at the current configuration:

Source: Source: Outstanding Investments
Click to open new window

The breakdown shows the euro makes up 57.6% of the US dollar index.

The Eurozone — where the euro is used — is an absolute disaster. Greece’s economy still hasn’t recovered from its bailout — and it will probably leave the Eurozone this year. Spain still can’t form a government. The Italian banks are riddled with 360 billion euros of bad debts. And Deutsche Bank — Germany’s biggest lender — has shown signs of going under.

The other major currencies in the index — the British pound and Japanese yen — aren’t much better.

Following the Brexit vote, the pound is trading at 31-year lows. If it doesn’t leave the European Union (EU) before it crashes and burns, the currency will go down the drain in the years ahead.

The Japanese yen is still a basket case. Abenomics, the policy package created by Japanese Prime Minister Shinzō Abe, is a total failure. It hasn’t stimulated the economy. The Bank of Japan is moving towards deeper negative rates. Making matters worse, it hinted at passing these costs on to deposit holders this year.

Where do you think capital will flow during times of chaos?

You got it.

Smart punters will move their money into the US — one of the only places in the world with positive interest rates. Of course, it’s not that simple. The US has the most advanced financial system in the world and, the majority of people ‘trust’ the dollar.

Gold is in trouble

With a catastrophic financial meltdown looming — possibly the greatest of all time —the US dollar is going much higher.

In my view, that’s great news for US treasuries (short term debt) in the near term, but not so good for US denominated assets and bonds (long term debt). For example, the US dollar has historically had a negative correlation with gold. You can see this on the chart below:

Source: MacroTrends
Click to open new window

The chart above compares the gold price with the broad trade-weighted US dollar index over the last 10 years. The trade-weighted US dollar index, also known as the broad index, is a measure of the value of the US dollar relative to other world currencies. The US Federal Reserve tracks the trade-weighted US dollar index closely.

The broad index measures the greenback against the currencies of 26 economies according to the size of bilateral trade. China, Mexico and Canada make up 46% of the gauge. If you read the mainstream media reports, those economies aren’t in great health. As such, I expect this dollar index to skyrocket in the years ahead.

Focusing on the chart above, the gold price (shown in blue) and the US dollar index (shown in orange) have had a strong negative correlation over the past 10 years. Although this relationship has altered a bit, the correlation has mostly continued over the past couple of months. You can see this on the chart below.

Source: MacroTrends
Click to open new window

The chart shows the US dollar (orange line) crashed when gold (blue line) surged higher into May. As you can see, when the US dollar rose sharply, gold pulled back by around $100 per ounce during May. The past two months have been a bit different. The US dollar has mostly rallied with gold.

The question is: will the new relationship continue going forward?

Based on history, and with gold trading around major resistance of US$1,360 per ounce, which I discussed on Friday in Money Morning, I have my concerns. While the positive relationship may become the ‘new normal’ in the years ahead, I expect the old relationship to return first.

It’s simple to understand why…

The next financial crisis looms

A bullish US dollar, against all currencies, will confirm confidence is fading around the world.

That’s not all…

It will destroy the world economy.

When the US dollar rises, the US economy will grind to a halt. It will become more expensive for international buyers — like you and me — to purchase US goods. When this happens, US business profit growth will plummet, and the world economy will crash and burn.

With slower economic growth on the cards, the world economy is facing higher unemployment and lower tax revenue.

Global governments, which are dead broke, will try to solve the problem by hiking taxes and export tariffs. That’s because politicians are clueless and don’t have any new ideas. Yet, like the Great Depression, this strategy will only destroy the world economy. And, with fewer dollars available to service sky high debts, the banking system is in big trouble.

When the global banking system goes under, the attention will quickly move to government bonds. No government has ever paid back its debt. In the future, global governments — including Australia — will default entirely, extend their maturity dates, or delay interest payments on their bonds.

If history is a good roadmap, I expect stocks, bonds, property, gold and commodities to crash during the initial stages of this financial meltdown. Institutions and retail investors are likely to be confused, moving their capital into cash and US treasuries for protection. That’s another reason why I’m not sure whether gold stocks are your best bet for now.

With the writing already on the wall, resources stocks should get a lot cheaper in the months ahead. When this happens, while they trade at bargain prices, I plan to recommend the best resource stocks on offer. In the meantime, I plan to recommend the best speculative resource stocks. These stocks have made my readers huge gains this year. I expect even bigger gains in the months ahead.

In my view, there’s no better place to make big gains than in resource stocks this year. Both in quick speculations, and after the crash with longer term investments. That’s why I wrote the free report, Three ‘Bounce-Back Mining Belters’ to Buy NOW.

Implementing my top-down approach, I’ve found three resource stocks that could make you massive profits in the months ahead. This is despite the market conditions.

To get your FREE report today, click here.


Jason Stevenson,
Resources Analyst

From the Port Phillip Publishing Library

Special Report: The greatest mind of the modern era is about to embark on his greatest and most ambitious project yet… A revolutionary, digital network designed to beam superfast internet to every inch of the planet…from space! And for you — as an investor — it could mark the start of an epic 14-fold profit run…if you’re willing to take a calculated risk with a small portion of your capital…(more)

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia