Dollar-pound parity is becoming an increasing possibility this year.
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- Gold Prices: Central Banks See Shine in Yellow Metal
- The Greek Bailout: Why I'm Mostly Bullish about the Eurozone
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- Progress Made on U.S.-China Trade, but Currency Roadblock Remains
- Currency War Carries On as G-20 Meeting Fails to Secure Specific Trade Targets
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- You Heard it Here First: China's Plan to Dethrone the Dollar Continues to Unfold
- Global Currency Wars: Three Ways to Profit From the "Race to the Bottom"
Mainstream economists and media pundits have been telling people that problems in China are unlikely to cause serious problems in the United States. They point to the fact that China only accounts for a small percentage of U.S. trade, for example, and that the falling Chinese stock market has very little to do with our stock market.
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I spent last week in Tokyo, and I want to share what I found on my trip to Japan.
It's proof positive that we're on the right track and, once again, we may beat a lot of people to the best investments, just like we did in September 2011.
That's when I told subscribers to short the yen a full six months and 150% ahead of George Soros and other big names who would subsequently make headlines for doing the same thing.
There's no doubt 2015 was one of the most volatile years in recent history.
But here's the thing... I believe 2016 could be even rougher.
We haven't even seen the sell-off I'm predicting yet; it's likely to make the plunge we saw on Aug. 24, 2015, look like a kiddie ride.
Just as there's nothing solid or healthy underpinning the stock market gains we're seeing now, there will be nothing to catch investors who aren't prepared to trade this volatility - just a long, deep drop.
There's no bottom in sight, but the good news is there's one easy way to trade just about everything the market is likely to throw at you this year.
Last week I was asked by a Wall Street Insights & Indictments reader about a new challenge to the U.S. role in the global economy that few are considering.
It's a dominant role we've held since the latter part of World War II, and for 70 years it's gone largely unchallenged.
The U.S. dollar has been the world's de facto reserve currency for almost 90 years.
But this financial dominance may be nearing its end.
In recent years, China's been floating the idea the yuan should take on the dollar's role as the world's reserve currency.
In fact, the Chinese have already negotiated numerous bilateral trade deals that completely bypass it.
And they've even called for efforts to "de-Americanize" the global economy.
Whatever happens, China's economic rise foreshadows increased influence.
It's a trend that not only has serious implications, but also great profit opportunities, if you know what to expect...
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But the picture for gold investors just brightened again thanks to increased activity from central banks.
Central banks are buying the yellow metal in copious amounts, marking the first time since 1965 that bankers have been such steady buyers.
Central banks amplified their gold stores by 400 metric tons, the equivalent of almost 2,205 pounds, in the 12 months through March 31. That was an increase from 156 tons in the same period a year ago, according to data from the World Gold Council.
Barron's reported Saturday that the World Gold Council "is now confident that central banks will continue to buy gold and has added official sector purchases as a new element of gold demand," according to a report from London-based bullion dealer Sharps Pixley.
The fresh facts indicate that central bank purchasing will continue for the foreseeable future.
That is quite a turnaround from the heavy selling the banks made from 1966 through 2007. During that time central bankers engaged in substantial selling, with only short periods of meager buying.
Even Andrew Roberts, a wonderful historian with whom I almost always agree, wrote in the Financial Times that "Europe's fire has gone out."
Today, the markets may welcome the Greek bailout deal, but behind the scenes they still dread the fact it won't work.
Meanwhile, hushed whispers are still being muttered about a Greek default as being "worse than Lehman."
On this subject I am a firm contrarian.
If Greece does default and is thrown out of the Eurozone, then I think Europe is actually due for a rebound - not a collapse.
It's only if they decide to bail out Greece again that I would become less optimistic.
If that is the case, they would be devoting hundreds of billions of taxpayer dollars (or euros, as it were) to propping up an inevitable failure. Even then, Greece is relatively small compared to the growth drivers in the Eurozone, which are strong.
The Problem with the Greek BailoutWhat the Greek crisis has shown is that European leaders in Germany and Scandinavia have their heads properly screwed on, but they are not yet a majority of EU opinion.
The EU bureaucracy simply gave in far too easily to Greece's first demand for a bailout, then suggested further bailouts for the entire Mediterranean littoral, all of which had over-expanded their governments on the back of low interest rates in the first decade of the euro.
Now reality is returning rapidly to the discussion.
That's why his loose monetary policy has some U.S. states looking to get into the gold coin business.
As I'll explain later, it's why my Gold Double-Eagles are becoming even more valuable.
Because while the U.S. Constitution bans states from printing their own paper money, it does allow states to make "gold and silver Coin a Tender in Payment of Debts."
Now no fewer than 13 states are seeking approval from their state legislatures, either to issue their own currency or to explore it as an option as the Fed's printing presses spin out of control.
So why is there this big rush by states to move into gold as an alternative currency?
It's simple really.
The Trouble with Fiat MoneyFiat money, created by central banks, possesses no intrinsic value. Paper money only works as long as governments don't create too much of it.
For pieces of paper to have value, we all have to believe there won't be too many of them and that the authority creating them has the preservation of their value as its top priority.
When that confidence vanishes, the fiat currency returns to being just paper - as it did famously in Weimar Germany in 1923. Or even more catastrophically in post-war Hungary, where the last stable symbol of value, the 1931 gold pengo, became worth 1.5 octillion 1946 paper pengos.
Of course, central banks do occasionally compete for foreign depositors by offering paper currencies with more stability.
In fact, before 2000, the U.S. dollar benefited from these flows that came from all over the world, including Europe.
Now, apart from the eccentrics who swear by the Japanese yen or the Chinese yuan, flight capital is largely confined to the Swiss Franc.
Since Switzerland is a small economy, the Swiss National Bank has drawn a hard line. It refuses to allow the franc to rise above 1.20 against the euro, so even that refuge has been made less attractive.
The Attractiveness of GoldAs you would expect, the private sector and some governments have begun to look further afield, and are beginning to focus on gold in particular.
Right now stocks are slipping and sliding all over the place, overall trending downward. And it doesn't look like this downtrend is going anywhere soon.
Short-selling can help you protect your overall portfolio when stocks start sliding off the map. Also, you can earn some of the fastest profits from short-selling in "down" markets because markets drop a lot faster than they rise.
We saw that over the last few weeks as the Dow Jones Industrial Average and Standard & Poor's 500 Index erased all their 2011 gains in a couple of days. That's pretty common. In fact, it usually takes an index all year to gain 10% to 20%. Then it can drop as much as 30% in a week.
So if you were able to short stocks during those times, you would make a decent return for a full year within weeks, or even days.
However, it's not always easy to execute short- sells in the stock market - which is why I always look for the best short-selling opportunities in foreign currencies first.
And I just found the ideal short-sell in the f orex market to play as markets fall.
The U.S. trade deficit with China this year could top $270 billion, surpassing the 2008 record of $268 billion. U.S. policymakers blame China's undervalued currency and government subsidies for the imbalance. China's disregard for intellectual property rights and bias towards its own domestic companies are also major points of contention.
In a rare show of conciliation, China during Wednesday's trade talks agreed to loosen some of its trade restrictions and better enforce intellectual-property rights on the Mainland -especially to curtail rampant software piracy that costs software makers an estimated $7.9 billion a year in lost revenue.
At a meeting last weekend in Gyeongju, South Korea, finance ministers from both developed and emerging economies agreed to try to maintain trade balances at "sustainable levels," which they left to be negotiated at a future date. They were unable to reach consensus on precise targets, as the United States proposed. G-20 members will meet again in Seoul on Nov. 11 and 12.
The G-20 was able to hammer out a deal to get China and the United States - as well as the other G-20 nations - to agree to "refrain from competitive devaluation of currencies," and to let markets set foreign-exchange values. China is widely seen as keeping its currency undervalued to boost its exports, while the United States has been accused of pursuing a weak dollar policy, also to increase its overseas shipments.
A slight dip in growth is what China wanted. Its gross domestic product (GDP) has grown on average more than 10% annually since 2006. The country's central bank lifted rates this week by 0.25 percentage points for the first time since 2007 to further cool the risk of overheating.
While working to maintain a healthy level of growth, China now has to contend with other countries devaluing their currencies to compete against a cheap yuan that is fueling an export-driven recovery. However, the whole world can't depend on exports – somewhere along the line there must be growth in demand.
German Economy Minister Rainer Bruederle warned yesterday (Wednesday) that a trade war could erupt if China didn't float its currency for a more fair value. As the China-U.S. currency tensions have heated up, other countries are saying China's unfair trade advantage is threatening export-driven recoveries around the globe.
"We have to take care that the currency war doesn't become a trade war," Bruederle told German business paper Handelsblatt. "China bears a lot of responsibility for ensuring that it doesn't come to an escalation."
The greenback has served as the world's benchmark reserve currency since the mid-20th century, but soaring deficits and the U.S. Federal Reserve's loose monetary policy have drained the dollar's value. Meanwhile, emerging markets - many of which are vibrant manufacturing hubs, net creditors, and have rich caches of commodities - are more fiscally sound than the United States, which has a $1.3 trillion budget deficit.
"If you look at the fundamentals of a lot of these emerging markets, they are considerably better than developed markets," Kenneth Akintewe, a Singapore-based investment manager at Aberdeen Asset Management PLC told Bloomberg in an Oct. 11 interview. "Who wants to be holding U.S. dollars at this stage?"
China, which leads the world with more than $2 trillion in currency reserves held mostly in U.S. Treasuries, is chief among the countries seeking respite from the dollar's decline. Beijing has long bemoaned the depreciation of the dollar, stating outright that it should be replaced as the world's main reserve currency.