The Race to Devalue Currencies Means One Thing for Sure

Race to Devalue CurrenciesAs the decline of the U.S. dollar continues, central banks around the world are scrambling to protect their foreign reserve and are questioning the U.S. dollar as a reserve currency.

I have been warning you about this issue for some time now. For central banks, gold bullion seems to be the only bet that will save them, as it provides stability compared to other fiat currencies, which are seeing extreme volatility.

The chart below shows the amount of U.S. dollars that central banks around the world hold in their foreign reserves.

As you can see from the above chart, the U.S. dollar as a reverse currency for central banks has steadily been dropping.

International Monetary Fund Chart

Chart Copyright Lombardi Publishing 2012; Data Source: International
Monetary Fund, September 28, 2012

Why might this be? It’s simple: the U.S. dollar has become too volatile, too much in supply, and the last thing central banks want is their reserves to fluctuate. Since the end of July, the U.S. dollar index (the value of the U.S. dollar compared to a basket of other popular world currencies) has shed roughly six percent. If my wealth and savings were going down at that rate, I would be worried—central banks are facing that worry.

So how are world central banks replacing their reserves? They’re buying gold bullion.

In these pages, I have written about how central banks have become net buyers of gold bullion. The central banks do not have any other options. Currencies are too risky for them. Some central banks will buy more gold bullion than others, but overall the trend is increased buying of gold bullion. Central banks buy gold bullion quietly, without advance notice.

While I have mentioned some of the central banks purchasing gold bullion in past issues of Profit Confidential, there are other central banks that have not made the news yet. Central banks of China, Russia, Saudi Arabia, and Korea hold less than 10% of their reserves in gold bullion. China holds only 1.7% and has the biggest foreign reserve. (Source: World Gold Council, October 5, 2012.)

The way I see it, the more fluctuation there is in the greenback, the more money central banks will most likely pour into the gold bullion market. In this time of economic uncertainty and currency debasement, gold bullion shines. Remember; there is only a limited amount of gold bullion and, the more time passes, the more central banks will be chasing it.

Michael’s Personal Notes:

The roller coaster ride up for the S&P 500 keeps moving higher.

Stock market rallies are great. I am certainly not against them, because, the higher they go, the higher the stock-picks we make in our financial newsletters go. But stock market rallies must have reasons for going up. A healthy S&P 500 stock market rally is composed of better future corporate earnings expectations, real economic growth, increased participation, and less uncertainty.

But this particular stock market rally is running on fumes and fear is creeping into the S&P 500 slowly. I can’t predict the exact date of the top, but I know that the current stock market rally can’t continue for too long within the current economic situation in the U.S.

Future earnings expectations from S&P 500 companies are low at the very best. We already know FedEx Corporation (NYSE/FDX) and The Procter & Gamble Company (NYSE/PG) have warned about future earnings growth. However, in spite of weaker earnings growth forecasts, optimism is high, and the stock prices of S&P 500 companies have certainly become more expensive.

The U.S. economy is facing a municipal debt crisis, a student debt crisis, out-of-control government borrowing, money printing, high unemployment, a falling greenback, and rising inflation.

And the fear is not going away. There was a net outflow of $5.08 billion from the U.S. domestic mutual funds in the last week of September. The outflow of money from mutual funds has been increasing since the last week of August. (Source: Investment Company Institute, October 3, 2012.)

The expectation of another round of quantitative easing (QE) by the Federal Reserve, QE4, could be the only reason the S&P 500 stock market rally is continuing. And it’s important to note that QE3 was open-ended—there is no cut-off date for QE3.

We are in one of those rare times in history when the stock market and economy are going in very different directions. Don’t be fooled by the stock market rally and ever-increasing S&P 500. It’s all going to end soon.

Where the Market Stands; Where it’s Headed:

There isn’t much about the stock market I haven’t already said above. We are near the end of a bear market rally in stocks that started in March of 2009.

What He Said:

“When property prices start coming down in North America, it won’t be a pretty sight, because consumers are too leveraged. When consumers have over-borrowed so much that they have no more room in their credit lines to borrow more, when institutions start to get tight on lending, demand for housing will decline and so will prices. It’s only a matter of logic, reality and time.” Michael Lombardi in Profit Confidential, June 23, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.