Rising Commodities And The Falling Dollar

Posted by Finance Professional on October 22, 2010 under Commodity & Futures News | Be the First to Comment

The only way to protect your savings (and make money) during the dollar devaluation that’s coming is to buy things that will gain value as the dollar falls. Gold is one of those things—arguably the strongest currency humans have ever relied on. Gold is an eztrader. Gold prices rise when the value of other currencies declines. As for other things that will gain, they are almost all commodities—with a concentration on copper and iron ore. With too many dollars chasing a limited supply of real assets like oil, silver, copper and rare earth minerals, and with global demand for raw materials and energy on the rise, commodities will likely be the most profitable investments you can ever make.

With economic power comes political power. China has already officially surpassed Japan as the second-largest economy in the world, and it’s showing that politically it also wields more clout than ever. It can be seen in the recent incident where a Chinese fishing trawler reported colliding with two Japanese Coast Guard ships in territorially disputed waters.

Japan detained the Chinese captain for more than two weeks, but after mounting pressure from China, it relented and released the captain, to the chagrin of some Japanese nationals who felt that their country bowed to China. What’s telling, however, is that China achieved its means not through military might but through economic pressure.

After Chinese Premier Wen Jiabao warned that China would take unspecified action if Japan refused to release the captain, China broke off bilateral talks on various economic issues and the Chinese trade ministry suspended issuing licenses to exporters of rare earth metals to Japan, effectively stopping shipments to Japan of the important group of metals used to make components for products from hybrid cars and televisions. China controls nearly all of the world’s reserves of rare earth metals, thus holding tremendous leverage, and had already reduced global export.

One hot topic now is the valuation of the binary options in Chinese yuan. In mid-June, China ended the yuan’s two-year peg to the dollar. The yuan has appreciated about 2 percent versus the dollar since, but it’s been deemed too little by U.S. policymakers and some are pressing for a 20 percent appreciation in binary options. The House of Representatives is moving closer to a vote that would lead to higher duties imposed on Chinese imports to compensate for the undervalued yuan, which has served a popular scapegoat for the economic malaise of the U.S.

The flipside of enacting legislation imposing higher duties on Chinese imports, of course, is that China can retaliate against U.S. imports and also make life difficult for multinational corporations that have presence in China. China has long maintained that a stable yuan is vital for stability in its economy which, although trending toward more domestic consumption, still relies heavily on exports. So it’s unlikely to allow a sizeable appreciation of its currency in a short period of time. An escalation of trade protectionism is a “lose-lose” situation for both sides so an eventual compromise on the issue is likely.

Going back to Japan, it is considering a stimulus package worth the equivalent of about $55 billion to support its sluggish economy. Two weeks ago, Japan aggressively sold the yen for the greenback on the open market to try to artificially lower the yen’s exchange rate. The currency had surged to a 15-year high against the dollar earlier this month as investors flocked to the yen for safety due to Japan’s large foreign reserves and current account surplus. An expensive yen hurts exports. A 915 billion yen ($11 billion) stimulus package was also announced earlier this month to spur their economy. Now with signs of a faltering Japanese recovery, Step 3 appears to be on the way.

With the possibilities of more monetary actions down the road form major economies—the aforementioned Japan, plus the U.S. and the E.U.—precious metals have greatly benefited. Gold set a record closing high and silver hit a 30-year high. Expect some normal corrections along the way, but both gold and silver’s uptrends are going to continue.

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