Posted on October 7, 2009 - by Venik

Your Savings and the Decline of the Dollar

About a year ago I wrote about the plans Russia and other oil-producing nations have for breaking the tie between the price of oil and the value of the dollar. For years Russia and OPEC countries have been tiptoeing around this issue until the recent massive collapse of the US banking industry forced their plans to the surface. A few days ago The Independent revealed some details of the plan to abandon the dollar: “Gulf Arabs are planning — along with China, Russia, Japan and France — to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen, Chinese yuan, the euro, gold, and a new, unified currency planned for nations in the Gulf Cooperation Council.” (The Independent, Oct. 6, 2009)

The original reason for switching oil trade from dollars to a composite currency was to control the inflation – the single biggest economic problem facing Russia, Saudi Arabia, Kuwait and other major oil producers. A lot has changed in this line of reasoning during the past year. The global crisis in the real estate, banking and lending industries originated in the US and caused a global economic recession. Abandoning dollar as the predominant currency for oil trade is now only a part of the overall strategy. The dollar is also to be replaced as the primary reserve currency.  To quote World Bank President Robert Zoellick, “The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency.”

Trouble comes in threes, common wisdom holds, and the final jab at the dollar’s reputation and value comes from Washington. In an attempt to deal with the breakdown of lending infrastructure, the US government flooded the markets with liquidity. The resulting drop in the value of the dollar is being already felt by the average US consumer. In April of 2008 the US savings rate was at zero (actually, it was below zero, since US consumers were getting deeper into debt), but recession panic set in, forcing people to start saving. By the end of June the savings rate reached nearly 7% – highest in almost fifteen years. Now the recession is still very much in progress but the savings rate in the US has declined to only 3% and continues to drop.

This actually makes perfect sense once we take into the account the erosive effect of massive liquidity injections and the unreasonably optimistic economic outlook adopted by the US government. Idiots resumed spending their hard-earned cash on useless trinkets, believing the economy is recovering, while realists see no reason to keep their savings in dollars just to lose everything to the inevitable sharp rise in inflation. The result of this downward movement of the dollar is best represented by the price of gold, as the aforementioned realists decided their savings will look better in yellow than in green.

Ordinarily, the price of gold goes down, as the price of oil goes up and vice versa. But these are extraordinary times. After collapsing to around $35/barrel in the beginning of 2009, the price of oil has since exceeded $70. During the same period of time, the price of gold went up from around $750/oz to nearly $1050 just yesterday. And so we have a 100% increase in the price of oil and a concurrent 40% growth in the price of gold. In retrospect, investing much of my savings in gold at the end of October of 2008 was not a bad move on my part. At the end of September of last year I advised you to invest in gold. Hopefully, you were paying attention.

So how quickly should we expect the Russians and the Chinese – the driving force behind the move to abandon the dollar – to act on their plans? Probably not too quickly. Most of the “anti-dollar” coalition is still heavily dependent on the greenback. They are holding trillions of dollars in currency reserves and they need time to convert their assets without creating a panic. Too rapid of a drop in the value of the dollar is not in anyone’s interests. At the same time, Russia, China and co. cannot afford a leisurely pace either, as the US is guaranteed to put up significant resistance.

According to The Independent, the process of moving away from the dollar is to be completed by 2018. It is my expectation that in reality this shift will come much sooner – perhaps in the next three years. So is this a good time to panic and start buying gold and foreign currency? Perhaps not, but I would recommend moving some of your long-term savings into short-term accounts: something you can cash easily should the need arise. Here’s another idea: open a savings account in a European bank and keep some of your money there in the form of foreign currency. Perhaps you should even open an account with a gold dealer of your choice. Place a small order just so that you know how the process works. It is not a time to panic – not yet – but it is the perfect opportunity to lay down some groundwork.

Whatever you do, you have to promise me one thing: you will never listen to CNN’s “money experts”.

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