Friday, September 30, 2011

How to Prepare for a Currency Crisis

Euro Capital interviewed Doug Casey in an interview entitled "HOW TO PREPARE FOR WHEN MONEY DIES"published in Peter Schiff's Gold Report. This is quite an interesting discussion on the US economy, the government role and the future of currencies. The final advice is to accumulate Gold.

Here's the transcript of the interview:

If dollar-dumping turns from a trickle into a flood, look out. Exploding prices (aka exorbitant inflation) resulting from the devaluation of the dollar will compound the problems we saw in 2007-2009. Catastrophe will come when everybody realizes that the dollar is an "IOU nothing." That's the downside in the decade(s) ahead, according to Casey Research Chairman Doug Casey. But an optimist at heart, in this interview with The Gold Report, Doug also identifies some reasons to be hopeful.

The Gold Report: You've been talking about two ticking time bombs. One is the trillions of dollars owned outside the US that investors could dump if they lose confidence. And the other is the trillions of dollars within the US that were created to paper over the crisis that started in 2007. Are these really explosive circumstances that will bring catastrophic results? Or will it just result in a huge, but manageable, hangover?

Doug Casey: Both, but in sequence. One thing that's for sure is that although the epicenter of this crisis will be the US, it's going to have truly worldwide effects. The US dollar is the de jure national currency of at least three other countries, and the de facto national currency of about 50 others. The main US export for many years has been paper dollars; in exchange, the nice foreigners send us Mercedes cars, Sony electronics, cocaine, coffee - and about everything you see on Walmart's shelves. It has been a one-way street for several decades, a free ride - but the party's over.

Nobody knows the numbers for sure, but foreign central banks and individuals outside the US own US dollars to the tune of something like $6 or $7 trillion. Especially during the recent crisis, the Fed created trillions more dollars to bail out the big financial institutions. At some point, foreign dollar holders will start dumping them; they are starting to realize this is like a game of Old Maid, with the dollar being the Old Maid card. I don't know what will set it off, but the markets are already very nervous about it. This nervousness is demonstrated in gold having hit $1,900 an ounce, copper at all-time highs, oil at $100 a barrel - the boom in commodity prices.

Some countries are already trying to get out of dollars, but it could become a panic if the selling goes from a trickle to a flood. So, yes, it's a time bomb waiting to go off, or maybe a landmine waiting to be stepped on. If a theatre catches fire and one person runs out, soon everybody rushes toward the door and they all get trampled. It's a very serious situation.

TGR: You warned early on in the 2008-2009 economic crisis that it would really be more of a hurricane. In the last year or so, we've been in the eye of the hurricane and there's more turmoil to come. Will the other side of the storm be worse than the first? And given the recent economic news, do you think we have moved out of that eye?

DC: Yes, I think we are moving out of the eye and going into the other side of the storm. This storm will be much more severe because we haven't solved any of the problems that caused the hurricane in the first place. The fact that governments all over the world have created trillions of currency units has only aggravated those problems. Now, I expect exploding prices to compound the problems that we saw back in 2007, 2008, and 2009. That will devastate the prudent people in society who saved money. They saved it in the form of currency, and wiping out their savings will be catastrophic.

TGR: That's something you've been saying for years - about this being the "Greater Depression." We are now four years into it, based on your 2007 start date.

DC: Actually, depending on how long a historical scale you look at, you could say that, for the working class in the US anyway, the depression started in the early 1970s. After inflation, after taxes, their take-home pay hasn't risen in real terms for 40 years. But the definition of a depression that I use is "a period of time during which most people's standard of living drops significantly."

Net savings shows that you're living within your means and putting aside capital for the future. In the US, people have been living above their means for many years - that is what debt is all about. Debt means that you are borrowing against future production, which is exactly what the US has been doing.

TGR: So, how long will this Greater Depression last?

DC: It doesn't have to last long at all. It could be quite brief if the US government, which is basically the root cause, retrenches vastly in size and defaults on the national debt, which is essentially an enormous mortgage, an albatross around the neck of the next several generations of Americans. The debt will be defaulted on one way or another, almost certainly through inflation. I simply advocate an honest, overt default; that would serve to punish those who, by lending to the government, have financed its depredations. Distortions and misallocations of capital that have been cranked into the economy for many years need to be liquidated. It could be unpleasant but brief.

The government is likely to do just the opposite, however. It will try to prop it up further and make it worse - compounding the problem by expanding the wars. So, it could last a very long time. In that sense, I'm not optimistic at all. I think there is little cause for optimism.

On the other hand, I'm generally optimistic for the future. There are only two causes for optimism. First, smart individuals all over the world continue, as individuals, to produce more than they consume and try to save the difference. That will build capital, which is of critical importance. Second, expanding and compounding technology will increase the standard of living. Remember that there are more scientists and engineers alive today than have lived in all previous history combined. Those two factors countervail the government stupidity around us. Whether they will be overwhelmed and washed away by a tsunami of statism and collectivism, I don't know.

TGR: You say that the US government is the root cause of this problem. Isn't that putting too much blame for a worldwide problem on one nation?

DC: The institution of government itself is the problem, and the problem is metastasizing like a cancer all over the world. But, sad to say, the US is the most serious offender because it is currently both the most powerful and the most aggressive nation-state. It has been greatly abetted by the fact that the US currency has been accepted globally. The US dollar is, in effect, the reserve that backs all the other currencies in the world. That is why the US government has been the most destructive from an economic point of view. Furthermore, military spending - which in the US equals that of all the other militaries in the world combined - is purely destructive. It serves no useful economic purpose at all. The military is no longer "defending" anything - least of all liberty. It's actively creating enemies and provoking conflict. So, yes, I think the US government is actually the most dangerous force roaming the world today.

TGR: Do you see that changing after the next election?

DC: No. I think the chances of Obama being reelected are high, simply because more than half of Americans are big net-recipients of state largesse. The US has turned into a larger version of Argentina politically, where the electorate is effectively bribed to vote for the biggest thief. It is likely to turn out much worse than Argentina, however. Unlike the Argentines, the US government is fairly efficient. And, unlike Argentina, the US is rapidly turning into a police state.

Electing a Republican might be even worse, though. With the exceptions of Ron Paul and Gary Johnson, the potential Republican candidates absolutely make my skin crawl. So, no, there is no help on the horizon. The US government is spending about $1.5 trillion more this year than it takes in, and it is not going to cut that. In fact, foolish spending to bail things out will increase. And, worse than that, the Fed has artificially suppressed interest rates for three years. Interest accounts for roughly 2% of $15 trillion official national debt, or $300 billion per year. As interest rates inevitably rise, that interest amount will grow. At 12% - and I'm afraid they'll have to go even higher than that - it would add another $1.5 trillion just in interest payments.

I absolutely see no way out without a collapse of the US currency and a total reordering of the US economy.

TGR: When Money Dies, the title of your latest summit, implies some return to a gold standard. How do you see that playing out?

DC: Nothing is certain, but when the dollar disappears - and it's going to reach its intrinsic value soon - what are people going to use as money? Will we gin up another fiat currency like the euro? The euro is likely to fail before the dollar. My suspicion is that people will want to go back to gold. It's not because gold is anything magical, but simply the one of the 92 naturally occurring elements that - for the same reasons that make aluminum good for planes and iron good for steel girders - is most useful as money. In fact, the reason that gold has risen as high as it has is that the central banks of third-world countries - places that don't have large gold reserves, such as China, India, Korea, Russia, even Mexico - have been buying the stuff in size.

TGR: The concept of going to a gold standard seems impossible in the sense that there is only so much gold above ground - 6 billion ounces? Maybe $11 trillion worth? But it's only a fraction of the US GDP. Even with gold at $2,000 an ounce, that leaves an immense gap. In that scenario, how do you convert to a gold standard?

DC: In terms of today's dollars, gold should probably be a lot higher than it is. I don't know what the number will be, because a lot of those dollars will disappear in bankruptcies; they will dry up and blow away. It's like a real estate development that was worth $1 billion on somebody's books; when it fails, that's $1 billion destroyed. It's a question of the battle of inflation (with the government creating dollars to prop things up) against deflation (where businesses fail and wipe out dollars). But put it this way: the US government reports it owns about 265 million ounces. Its liabilities to foreigners alone are at least $6 trillion. If they were to be redeemed for a fixed amount, that would require roughly $22,000/oz gold. And that doesn't count dollars in the US itself.

I'm a bargain hunter and a bottom fisher, and bought most of my gold at vastly lower prices. But I think gold is going much higher because most people still barely even know that the stuff exists. As inflation picks up, they are going to want to get rid of these dollars - but what other monetary commodity can they turn to? So, gold is going higher. I'm still accumulating gold.

TGR: Thank you for the tips, Doug, and as always, for your thoughtful insights.

Five Favorites Currencies by Peter Schiff and Axel Merck

Peter Schiff of Euro Pacific and Axel Merk of Merk Investments have just release a new report about entitled: "Peter Schiff’s & Axel Merk’s Five Favorite Currencies for the Next Five Years"

The first 4 currencies they select is based on different geographical zones:
  • The Anglosphere: Australian Dollar (Peter Schiff) & New Zealand Dollar (Axel Merk)
  • The Nordic Bloc: Norwegian Krona (Peter Schfiff) & Swedish Krona (Axel Merk)
  • Continental Europe: Euro (Axel Merk) & Swiss Franc (Peter Schiff)
  • East Asia: Singapore Dollar (Pete Schiff) & Chinese RMB (Axel Merk)
The last choice is their wild card:
  • Canadian Dollar for Axel Merk
  • Chinese Renminbi for Peter Schiff
If you want to know the reasons behind their choices you can download the full 23-page report at

Thursday, September 22, 2011

Jim Rogers: The US Dollar is not a Safe haven

Interview with Jim Rogers on CNBC on the 22nd of September 2011.

He said right now he would just hold USD, CHF (Swiss Franc) or Agriculture, although he does not consider the US dollar to be a safe haven in the long term.

Thursday, September 15, 2011

Why is the British Pound a doomed currency ?

I previously talked about the reasons the US dollar is doomed based on my analysis. Today, I'll show why the British pound (GBP) is also doomed based on the research made by Tullett Prebon financial firm and published in their report entitled "Thinking the Unthinkable" part of Project Armageddon.

When considering public and private debt, the United Kingdom is actually one of the most indebted countries in the world as a percentage of GDP with 167% public debt (including quasi-debt obligations, but excluding potential commitments created by financial interventions) and 97% of private debt (mortgage and consumer debt) . That's 264% debt to GDP ratio.

Tullett Prebon concluded that Britain’s debts are unsupportable without sustained economic growth, and that the economy, as currently configured, is aligned against growth.

So they come to the same conclusion as Jim Rogers who famously said the "UK is finished", unless some miracles happen such as an economic growth of at least 2.9 % between 2011 until 2016.

On top of that, the UK external debt (owned by foreigner) is at an amazing 400% of GDP (or 143 000 USD per person ) far higher than in Greece, Spain or Portugal, and if foreigner decide to sell UK debt, the British pound would completely be decimated. The UK, as the US, also has a trade deficit which usually makes a currency weak.

Tullen Prebon explains that bankruptcy is a very possible outcome for the United Kingdom but the idea has not yet made its way into the public mind.

You could read the full report below.

Tullett Prebon Project Armagedon Aug 2011

Friday, September 9, 2011

Jim Rogers: Buy the Euro After Greece Defaults

Jim Rogers is interviewed on CNBC on the 9th of September 2011 where he discusses the possible Greek default and subsequent contagion risks to other PIIGS. He recommend to buy as much as Euro as you can after the crisis, as the Euro would be lower but be a stronger currency in the long term. Jump to 6:55 on the video below to listen to Jim Rogers.

David Morgan - The Currency Crisis Continues

David Morgan of is interviewed by Stellaconcepts on the 8th of September 2011.

David Morgan explains the currency crisis continues (citing the Euro crisis) and that Gold is not in a bubble.

He also gives a possible target of 5000 USD for one ounce of Gold, but as he believes it's actually the fiat currencies that go down instead of Gold going up, he prefers to see the price of Gold in terms of ratio to the stock market or silver. He except the Gold to Silver ratio to return to its historical ratio of 16.

He is very bullish on Silver because of 3 reasons:
  1. There 66% less silver than during the 1980 bull market
  2. Back then, it was mainly a US market and now it's a global market
  3. Internet is there and allow people to quickly buy or sell
Finally, he gives his views on the Comex which he thinks will never (officially) default as there are mainly loopholes and he states that mainstream media is biased against Gold (the barbaric relic).

Wednesday, September 7, 2011

Jim Rogers: The Chinese yuan is the next safe haven currency.

Jim Rogers was interviewed on CNBC on Wednesday 7th September 2011 to discuss the recent move by the SNB (Swiss National Bank). Here are his views on the move and the Chinese yuan:

"The Swiss central bank's decision to set a limit on how much the Swiss franc can appreciate against the euro is "a huge mistake". The move will work for a while, but the market will have more money in the end than the SNB which risks losing a lot of money buying up lots of foreign currencies which they will eventually sell at a loss. Another risk is that the central bank will totally debase the Swiss franc trying to keep Switzerland 'competitive' which will then destroy the traditional Swiss financial industry. So this is a huge mistake for Switzerland since they are going to suffer more either way"

"RMB is best, the US dollar is probably good in the short term, but the absolute worst over the long term. There are various ways to get RMB exposure outside China, investors can now open bank accounts in renminbi in various cities like New York, San Francisco, Hong Kong, Singapore and others and can buy renminbi-denominated bonds in the international markets."

Tuesday, September 6, 2011

Consequences of a Euro break Up by UBS

UBS has written a 21-page report discussing the potential impacts of a Euro break-up.

It explains why the Euro should not exist as it is structured today and "simulate" break-up scenario (weak country leaves, strong country leaves...) and try to anticipate the possible consequences.

To conclude they answer the question "How should investors invest in case of a Euro break-up?" The answer:

The only way to hedge against a Euro break-up scenario is to own no Euro assets at all.

You can read the report below.


CHF is now effectively pegged to Euro at 1.20

In a dramatic move, the SNB has decided to put a floor on the price of the CHF vs Euro, a floor at 1.20 CHF per Euro. This is a defacto peg to the Euro as the Swiss franc is unlikely to decline and this resulted in a massive 8% move in the Swiss Franc / Euro exchange rate a massive move (probably unheard of) in the currency markets. (See chart below. Source: Yahoo Finance)

Another battle has been fought in the currency war and the Swiss Franc is no longer a safe heaven. There remains the Yen (but I wonder why) and possibly the Singapore dollar (SGD) which appreciated around 6% against the USD since the beginning of the year. Of course, there is still gold and silver which should remain the real safe heavens.

Monday, September 5, 2011

Marc Faber: The Euro Will Survive

Marc Faber was asked the question "What is your take on the future of the Euro ?" on Bloomberg Radio (August 2011) and answered:

I think it will survive... but the question is: will it survive as a Euro of France and Germany and maybe 2 or 3 other countries, and the other countries will leave, or will it survive as a Euro of the weak countries and Germany will leave? This is the big issue.

Sunday, September 4, 2011

China purchases Gold to undermine the US Dollar

Zero Hedge has reported on one of the recent Wikileaks cables where China explains its view on Gold in that it helps it undermine the role of the US dollar as the reserve currency and would help internationalizing the RMB .


"China increases its gold reserves in order to kill two birds with one stone"

"The China Radio International sponsored newspaper World News Journal (Shijie Xinwenbao)(04/28): "According to China's National Foreign Exchanges Administration China 's gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB."

So now let's assume that China bring the level of its gold reserve to the same levels as developed countries.

Rank↓ Country/Organization↓ Gold
Gold's share
of national
forex reserves (%)[10]↓
- European Union Eurozone 10,792.6 60.7%
1 United States USA 8,133.5 74.7%
2 Germany Germany 3,401.0 71.7%
3 IMF 2,846.7 -
4 Italy Italy 2,451.8 71.4%
5 France France 2,435.4 66.1%
6 People's Republic of China China 1,054.1 1.7%

As you can see from the Wikipedia table above, as of December 2010, China only had 1.7% of its foreign currency reserve in Gold, and to reach the level developed countries this would have to reach around 60 to 70 %. Let's say China forex reserves are now 3 trillions USD, it would need 2 trillions USD worth of Gold. At today's price (1880 USD per ounce ~ 66,000 USD per kilogram), it would represent around 30,300 tons of gold. To put that in perpective, a total of 165,000 tons of gold have been mined in human history, the total amount of Gold the USA hold is 8133,5 and the amount of Gold helf by the SPDR Gold Shares ETF is 1239 (May 2011).

So the Gold price would have to go much higher if China decided to convert 2/3 of it forex reserves. This would be a process taking several years (or maybe decades) , and China would finally need to hold less than 30,300 tons of Gold, as the Gold price would go up.

If the US, Europe, Japan or Great Britain experience massive inflation or even hyperinflation, the Gold reserve required by China to reach 2/3 of forex reserves would also decrease.

One last point, that is not directly related to China: Pension funds in the US currently hold around 0.3% of their assets in Gold bullion and gold mining shares whereas the historical norm during between 1960 and 1980 was around 5% and it went to 20% during the Gold bubble in 1980.