Weakening dollar

With just three trading days until the first FOMC meeting of the year, the U.S. dollar had a pretty bad week. It’s not clear, and it’s definitely not discounted, that the Fed will lower rates on Wednesday, but the Greenland episode, paired with the fiscal problems in Japan, where the BoJ and the Minister of Finace may have intervened in the markets to sell dollars to defend the Yen, have had an impact on the green buck. The flip side, has been the incredible week precious metals have had. Silver was up almost 15% and gold 8% over the week. There are a lot of comments coming from Davos that point to a change in the global monetary system, something that does not happen overnight, but the dynamics seem to be accelerating. The question is: changing into what? What does the new order look like? Historically, whenever we have had an episode of eroding confidence in a fiat currency, the system went back to hard money, typically gold and silver. During the Weimar Republic, the old mark, which was renamed and commonly referred as “papiermark” (paper mark) was substituted by the Rentenmark, which was backed by land, since they didn’t have enough gold to back it up. Once they stabilized the system, they were able to introduce the new Reichsmark, backed by gold and loans from other countries. It’s interesting to see that BRIC countries are following a similar model when it comes to the UNIT. Paraphrasing Mark Twain, the rumors of the dollar death, have been greatly exaggerated, but the trend points in that direction. The practical corollary is that nominal returns are becoming less relevant, and real returns, are the ones that really matter. A return of 20% in USD may look very good in a stable fiat system, but its poor in an environment where fiat currencies are being debased by debt and deficits.

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