Moneyization: The global financial phenomenon
of individuals and businesses moving their funds to
monies in which they have the highest confidence,
or money which has a higher store of faith.
Or, Not Everyone Lives in Dollars
On a regular basis, questions arrive worth
some time and thought. The motivation for this article
is largely those questions from individuals living outside
the United States. An attempt will be made to answer
some of those questions, but remember this is a short
answer quiz not an essay test. While our thinking is
largely on the dollar, one can not consider that subject
without reflection on the "other side" of
the trade. That below are answers that might need modification
is expected. Any reader with an idea on any matter discussed
is strongly encouraged to send an email with those thoughts.
We always like to be more right in the future than at
the present. U.S. investors will benefit from understanding
the strategies being used to defend against the U.S.
dollar's problems, and helping to create them.
How will the dollar's demise affect
This question is one on which our thinking
has changed. Gray(2004) writes of concern over how the
U.S. cumulative current account deficit might impact
the global economy. In particular, that concern comes
from the length of time it has persisted and the size
of that annual deficit. One way of thinking about this
is to imagine a rectangle with one side the length of
time that the U.S. has experienced a current account
deficit. The second side is the dollar amount of the
annual deficit. Remember, area equals length times height.
This imaginary rectangle gives a picture
of the size of the problem. Now picture that rectangle
sitting on top of the world's economy, or being held
in the hand of Atlas. In 1995, that rectangle would
have been far smaller than at the present. The magnitude
of the problem was such that remedies would have been
easier. Any necessary adjustment in global economic
activity then would not have been as large as now required.
Global demand would not have been seriously reduced
in correcting the situation. However, the debt rectangle
is expanding by the product of time and size.
debt rectangle is 10-11 times larger, and still growing.
The U.S. annual current account deficit is now much
larger and has gone on far a long time. The magnitude
of the problem is far greater. To rectify the situation,
which can not persist indefinitely, will require a massive
reduction in U.S. consumer spending. The elimination
of this giant "debt rectangle" would require
U.S. consumers to reduced their buying of global goods
by a tremendous amount, perhaps as much as $700-800
billion a year.
Had action been taken in 1995, the global
economy would have experienced a mild case of indigestion.
Today, the remedy requires a Great Recession in the
U.S. which will then flow around the world in epidemic
proportion. No vaccine exists, and those contracting
the disease will feel their economic livelihoods threatened.
Those nations that have made a living off U.S. consumers
will discover the meaning of "contagion effect."
The U.S. Great Recession will spread internationally,
causing serious hardship in many countries.
Countries like Canada, where trade with
the United States is the lifeblood of the economy, could
discover the meaning of economic diarrhea. Island nations
dependent on U.S. tourism should be deeply concerned.
Nations with little or no trade with the U.S. may also
feel the effects. If a nation does a lot of business
with a nation that relies on the U.S. for business,
the ripple effect will be felt. No place to run,
no place to hide; as the song goes.
While nations are one dimension, individual
situations may be more important. The nation effect
is only one aspect. Consideration must be given to individual
business situations. Is your company dependent on
the U.S. or dependent on a business that is dependent
on the U.S.? If the answer to that question is yes,
then individual circumstances may dominate and concern
should be high.
Should I remain in my national money?
This question came from a Euro resident.
That person's situation is much better than most.
The Euro is in ascendency to be the
new monetary hegemon, replacing the U.S. dollar.
Relative to the dollar, the Euro is a preferable currency.
Due, however, to issues of political unity in the EU,
the ride could be rough at times.
Should the fiat money framework develop
serious problems, as expected, all the boats will settle
into the water. The Euro is in a positive cycle overlaid
on what may be a negative trend for fiat monies. The
table below on buying Gold, depending on your currency,
should make our views fairly well known. Unless your
national money is Euro, yen or renminbi, moving on to
Gold and a national money higher up the pyramid would
Will Gold, and Silver, appreciate in
terms of my money?
The table summarizes our view on the wisdom
of buying Gold based on your national money. If your
national money is not listed, moving to Gold should
be done in an expeditious manner. Some national monies,
such as Australia, are a difficult call, and are good
examples of the complexity of the matter. While longer
term the Australian dollar is likely to disappear, what
happens between now and then and into what it converts
are real questions. Proximity to China should benefit
the Australian dollar, perhaps supporting its value
in the short-term. If the U.S. Great Recession spreads
to demand for Chinese goods and subsequently to demand
for Australian output, the situation could deteriorate
rapidly. Ultimately, conversion to Chinese renminbi
is a possibility. Since markets are aware of this possibility,
Aussie dollar may be buoyed somewhat.
only on high Euro optimism.
Buy on any CN $ rally.
subject to comments above.
on high Euro optimism.
on high Euro optimism.
Money obsolescence a factor. **Will convert to Euro.
Monies that may
to Euro are a difficult call, due to unknown conversion
Should a Euro citizen buy Gold?
This question is being addressed specifically,
despite comments in the table above, as the asker is
a Euro citizen. Euro citizens
should buy Gold only when optimism over Euro is extremely
high, depressing the Euro price of Gold. Too
many trends are in place for the Euro's benefit, despite
occasional signs of political disunity, to buy Gold
without careful attention to timing. For example, even
in France the world is changing. During June, the first
private freight train since 1938 operated in France(Wright,2004,p.4).
Such changes are emotionally painful, and were a factor
in the French vote on the EU constitution.
Other nations are anxious to enter the
Euro, and the citizens of those countries are already
voting with their money. To the east lies Russia, with
holdings of U.S. dollars second only to the U.S. Given
the proximity to the EU, conversion of those dollars
to Euros over time seems likely. And that perpetual
rumor of Russia pricing energy in Euros rather than
dollars persists, and makes reasonable sense.
The first graph plots Euro Gold against
a measure of sentiment. The sentiment oscillator is
plotted on the right axis, and is inverted to make comparison
with Euro Gold easier. That measure runs from maximum
optimism at -100% to maximum pessimism at 0%. Currently
that measure is well into high negative pessimism and
turning down. This condition suggests not buying Gold
with Euros at this time. As
can be observed in the chart, times of heavy optimism
are the time to buy Gold for Euro citizens.
Should we short the dollar?
Most investors should not be short in
the financial sector except on rare occasions. Shorting
financials requires incredible discipline. Unless one
is a truly disciplined investor, the answer is no. Techniques
exist to use futures and other derivatives wisely, but
few will use them in that way. Inevitably, individuals
get greedy and start to believe they are traders. For most people, better to be long something in a disciplined
manner than short something in unwise fashion.
Can we buy Chinese renminbi?
Yes, if you are a Chinese citizen living
in China. The rest of us have to do something else.
Non-deliverable forward contracts exist in the institutional
arena, but this market is not suited for individuals.
Some brokers have developed strategies using deposit
arrangements in countries near China where the national
money will rise with the Chinese renminbi. Some of these
ideas are reasonable and might be considered. See your
own broker for ideas.
Should we buy Chinese stocks?
At the racetrack, only winning tickets
are talked about. No one wants to brag about a losing
ticket. Winning stocks on the China play seem to be
well talked about. That vast number that do not work
out seem to be ignored. Buying paper assets is appealing
and easy, but how much money foreign investors will
make still seems a question.
When the Chinese renminbi becomes fully convertible,
buying China stocks will make more sense.
After the U.S. Great
Recession, Chinese stocks will be a far better buy.
Should we buy Asian investments, as
This alternative may make more sense than
buying China stocks. What one is looking for is a company
that does a lot business with China, and makes money
doing so. Research may keep you busy. Remember too that
they will be more volatile than the Chinese economy.
Same comment reference to U.S. Great Recession applies
we buy coins or shares?
the goal, paper is not Gold. Basic source
of return in a period of risk for fiat national moneys
is the Gold itself. Why would an investor distance themselves
from the basic source of the return? Suppose water was
in short supply. Would buying stock in a company that
makes plastic water bottles be the equivalent? No, of
course not. The further distance an investment is
from the source of return, the greater will be other
factors that dilute or influence returns. Gold is Gold.
Gold shares are paper.
An investor should start with a basic
position in the metal itself. Benefitting from the likely
price appreciation of Gold in terms of your national
money is the goal. Before going on to any of the
"paper" alternatives, one should have a basic
position in Gold, the metal itself. And of course,
the same argument applies to Silver. If investing in
Silver is your interest, then invest in Silver not plastic
Then the question of whether to buy the
coins or the bullion arises. This author has a bias
toward coins for the average investor. Bullion has issues
related to authentication that need not be addressed
if investing in coins. That all said, Sanders(2004)
points out often, the investor should be attempting
to own as many ounces of Gold or Silver as possible.
In the end, one wants to own as many ounces of Gold
or Silver, as can be achieved with timely purchases
and trades. Coins
and bullion can sell at varying premiums to each other
over time.. An investor must seek out a good dealer that can help
with wise purchases and trades, selling them what is
best for the investor not what is best for the dealer.
For some investors the ownership of the
physical metal may be difficult, or simply something
the investor does not want to bother with. Those investors
should turn to the many forms of Exchange Traded Gold(ETGs)
or Gold funds that might be available. These alternatives
come in a variety of forms, each with particular advantages
and disadvantages. ETGs and Gold funds allow investors
to gain the benefits of owning Gold, without dealing
with the issues of the physical metal. Perhaps the best
attributes of ETGs and Gold funds are speed of execution
and ease of purchase. Just click your mouse and you
own the benefits of Gold, or Silver soon. In
all cases, investors should read the prospectus before
The hierarchy starts with the purchase
of the metals, coins or bullion. Second, choice is the
ETGs and Gold funds. Only after an investor has these
positions should the stocks be considered. Investors
need to be willing to expend the time and be willing
to lose some money in the education process necessary
to become successful at buying the stocks. Therefore,
the stocks should be bought only after the basic exposure
to Gold and Silver has been created.
What if we have U.S. customers?
We talk little about the needs of businesses
in these discussions. Businesses with customers in the
U.S. should be moving to a system of invoicing in Euros
if possible. Your ability to do so will in part depend
on the power relationship between you and the customer.
Another problem is that most U.S. banks, unfortunately,
are still in the 19th century. Most U.S.
banks only offer dollar denominated deposit accounts.
U.S.-based customers often do not have the ability to
easily pay in Euros. If they do, try for the payment
in Euros. In this way, the customer bears the cost of
the money conversion. These issues all translate into
the final price for the customer, and individual situations
What if we have European or other Euro
The problem you face is that your U.S.
bank will be a handicap. Most U.S. banks offer deposit
accounts denominated only in U.S. dollars. You may have
to open a deposit account with a non-U.S. bank with
branches in the U.S. What you need is a deposit account
denominated in Euros. With a Euro denominated account
you can invoice your European customers in Euros, and
they can pay in Euros. That way you are not paying money
conversion fees except when you want to convert to dollars.
Over time the balance remaining in Euros should appreciate
against the dollar. That gain on your Euro balances
will increase your profit margin.
Should $-based investors be buying
In the first graph we looked at the recommended
action on Gold for Euro denominated investors. As the
Euro has been passing through a period of extreme pessimism,
the dollar has been the focus of over optimism. Those
periods of over optimism on the U.S. dollar provide
buying opportunities for $Gold, as shown in the last
graph. Investors should be using these periods of price
weakness to build positions. Gold and Silver are
both poised to move up out of the lateral patterns in
which they have been trapped by dollar optimism.
That move out of the
lateral pattern will create the foundation for Gold
to take out the 2004 high, and give Silver an opportunity
to assault $9 as fall approaches. $1,300
is still the target for investors, but that will be
accomplished one rally at a time.
Gray, H. P.(2004). The exhaustion
of the dollar. New York: Palgrave Macmillan.
Sanders, Franklin(2004) Why silver
will outperform Gold 400% & The professional trading
secrets that will make you the most of your silver and
gold investments. Westpoint TN: Moneychanger Publications,
Wright, R.(2005, June 15). New train shifts
inertia of French rail freight. Financial Times,
Ned W. Schmidt,CFA,CEBS
is publisher of THE VALUE VIEW GOLD REPORT. That report
now includes a weekly message, TRADING THOUGHTS, to
help investors identify timely points for buying Gold
and Silver. You can join him for the Gold Super Cycle
His monumental report, "$1,265 GOLD", which
has now been read in 12 countries, has 255 pages and
98 graphs, is available at www.amazon.com
or from the author. Ned welcomes your comments and questions.
His mission in life is to rescue investors from the
abyss of financial assets and the coming collapse of
the U.S. dollar. He can be contacted at firstname.lastname@example.org.