What should investors do as central banks reduce dollar reserves?
*Dow Theory Letters, Richard Russell, August 18, 2006:
"Now here's an interesting consideration, and I've thought about
this a lot. The people who run the central banks of the world are well
aware of this debt situation in the US. They are well aware that the US
is the world's greatest debtor and that the situation is becoming
progressively worse. These foreign central bankers know that the US
absolutely must opt for inflation in view of the US's massive debts and
liabilities.
But the problem is that all these central banks use US dollars as their
reserves. In some cases, dollars comprise almost 100 percent of their
foreign reserves. How do they handle this predicament, how do these
central banks "protect themselves" against a dollar collapse? The trick
is to diversify, and increasingly, that's what they're doing.
Jim Grant of "Interest Rate Observer" fame notes in his latest report
that Russia, flush with oil money, has reduced its dollar holdings from
"70% or so a year ago" down to 40%, and the dollar-ruble exchange rate
sits at a seven-year low." Sweden has lowered its dollar reserves from
37% to 20%. Italy is mulling over diversifying into the British pound.
Obviously, many Arab nations will be moving to decrease the percentage
of their dollar holdings.
As I see it, the move to cut down on dollar holdings is just beginning.
It will pick up speed as US indebtedness builds. And, of course,
politics will play a major part in the world's distancing itself from
dollars.
In view of all of the above, what should our position be? The only
thing I can think of is to diversify."
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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