We hear from Bloomberg
that both the United Arab Emirates and Qatar could abandon their
currency pegs to the U.S. dollar in favor of a basket of currencies
within months, and Saudi Arabia may follow the move late next year.
They would all be following the lead of Kuwait, which last year broke
from its neighbors and fixed its dinar to a basket of currencies.Why
are the Gulf States doing this? Thanks to surging energy prices, Gulf
nations are experiencing an unprecedented boom, and an increasing
inflation problem. Yet their currencies are depreciating and their
central banks are under pressure to cut their nominal interest rates to
match the Fed. Plainly,
the US Fed’s easy money policy does not work for them. Even though many
investors believe the US interest rate easing cycle is at an end –
futures on the Chicago Board of Trade showed traders saw a 92%
likelihood the Fed will keep its target rate for overnight lending between banks at 2% on June 25, up from odds of 88% on May 21 — it’s too little, too late for the Gulf states.What’s more, Forbes quotes Deutsche Bank and others as saying that the Fed may NOT be through cutting rates, and may drop the benchmark from an already low 2%.Continued
cuts in the Fed benchmark rate could grease an already slippery slope
for the US dollar. Since the Fed cut rates from 5.25% to 2% since last
August, wholesale inflation has increased to 6.5% year over year and
the price of oil has soared to over $130 from $70. A global
supply/demand squeeze for distillates like diesel gets much of the
credit, but the meteoric rise in oil prices wouldn’t have happened
without the Fed’s help. If the value of the US dollar had just held
steady since August, the price of oil would be under $90 a barrel.And as bad as inflation is, it’s probably much worse than the government admits. ShadowStats.com
is a website that tracks the Consumer Price Index the same way it was
before the Clinton administration started monkeying around with it. And
according to ShadowStats, consumer price inflation is running at more
than 3 full percentage points hotter than the government says. Would
the government lie to you? Hahahahaha!And
this is my long-winded way of getting to my subject: Gold and silver
prices. It seems that foreign governments, especially those in the
Persian Gulf, are losing their faith in the almighty dollar and the
policies of the US government. That undercuts the mighty greenback’s
standing as the world reserve currency. Now, that doesn’t mean your
dollars become worthless overnight. But the more its reputation gets
chipped away, the faster its downward slide can become. I think this has the potential to heat up the fires under gold and silver quite a bit.If
paper money becomes devalued, people will put more faith in hard
currencies. More and more Moms and Pops put a few gold and silver coins
away “just in case,” and the trickle we see in gold and silver coin
investing now can become a flood. And thus we learn from the Wall
Street Journal that demand is simply overwhelming the supply of US Silver Eagles. Why are so many “early movers” suddenly buying silver coins. What are they afraid of?As the old saying goes, if you have to ask that question, you haven’t been paying attention.

Last 5 posts by Sean Brodrick

• The Golden Phoenix - February 25th, 2009
• Blessing in Disguise - February 4th, 2009
• What I'm Reading Today - January 7th, 2009
• Gold and Oil Short-Term Trends - January 7th, 2009
• Is Gold Poised for a Pullback? - January 6th, 2009