Dollar to Lose Reserve Status - PIMCO

From Bloomberg

Pacific Investment Management Co., which runs the world’s biggest bond fund, said the dollar will probably fall as it loses its status as a reserve currency.

The dollar will especially drop against emerging-market counterparts, Curtis A. Mewbourne , a Pimco portfolio manager, wrote in a report on the company’s Web site. Investors should consider cutting their holdings of the U.S. currency, he said.

“While we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative,” Mewbourne wrote

Though I agree that the US dollar is losing status and will continue to fall against currencies of fast-growing emerging nations, it is difficult to see any alternative to the dollar as a reserve currency in the foreseeable future.

Having said that, I am long gold, and expect to see gold hit new highs as all fiat currencies lose value relative to real assets.

Comments

[FGR]

but a home isnt a REAL ASSET, it seems, it keeps losing in value anywhere in the world...

[dacian]

The question here is the timing; yes, the fundamentals are poor for paper currencies but in deflation they go up relative to other assets. Gold is the only thing which does well in a credit event (even though I'm wondering how's that last year, when we were plunging like crazy on the markets, gold didn't move much higher?)

What I see right now on the dollar is rather a bottom and a min-bull market which might go higher than many think (1/2 years)! Today, only 3% of traders are bull the dollar; everyone and their sister's bet on a falling $. They might be right, but the markets rarely do the obvious.

The only situation I see the $ will be dismiss will be a total panic induced by authorities (something like printing 10$ trillion dollars more out of nothing).

[psychodave]

"(even though I'm wondering how's that last year, when we were plunging like crazy on the markets, gold didn't move much higher?)"
@dacian | August 19, 2009 at 09:36 AM

To speak to your excellent observation, I'd offer that I view the 1.0 correlation between all assets between the Lehman failure and the end of January 2009 as a pure credit crunch.

E.g. banks + shadow banking, knowing their balance sheet position was no better than Lehman's or any of their competitors, got sincerely and intensely retentive with any cash they got their hands on.

The only price support left for any asset was your archetypal Vanguard buy & hold long term investor, plus the fringe element. The level of leverage-supported positions in assets became toothskin thin.

Although our gracious host wasn't posting back in 2002, let's ask this competent investor if he was long gold anytime between 9/11 and October 2002, or even during the inflation scares of 2007.

[Shankar Khadye]

We remain in a deflationary collapse and till the collapse is complete over the next 12-18 months, Gold will probably move lower significantly.

Inflationistas (such as you) who are long Gold will probably go bankrupt proving their case.

And Deflationistas who will make big money shorting ALL asset classes (except Cash and Treasuries) will find that the money they made was paper money after all.

Long Gold, we'll see how you feel in a couple of months.

- Shankar

[dacian]

"We remain in a deflationary collapse and till the collapse is complete over the next 12-18 months, Gold will probably move lower significantly."

Shankar, I do agree we are in a deflationist environment but gold might do well in deflation! Actually, gold doesn't do that well in inflation (yeah, I know it sounds odd). I'm talking more from what I read and observed (I have little experience and I'm not a gold bug), but gold does well in stressing environments (being hyperinflation or credit crunch/depression). Actually, gold is the single commodity (not silver, not gold miners but gold "the metal") which might hold during deflationary environments.

Of course I'm not sure about that, but inflationistas who are long gold (for the wrong reason :)), might make some money. Time will tell...

[dacian]

Well, I'm reading this on that article from PIMPCO

"So while it is true that no emerging currencies have yet reached critical mass as a viable replacement, there are many reasons to expect a secular decline in the value of the U.S. dollar."

Secular decline? The USD had its secular decline! It's going down for decades now. Is a secular decline lasting like 200 years? WTF?

[Shankar Khadye]

Dacian:

Long-term (over the next 3-5+ years) Gold will do very well because most currencies will decline against commodities.

However, in the short/intermediate term (12-18 months), the deflationary phase of this depression continues, commodities (including Gold) will go down. The reason is simple - deflation destroys debt and the real money (cash) increases in value.

As I said, I would love to see how you guys feel after the next couple of months.

[dacian]

Here is a very good post which clearly demonstrates imo why the FED can't and won't give away free money to everyone. Most people ignore that and thing the FED powers are unlimited; this is silly.

"The "central banks are powerless argument" always leads to the inevitable response: Why can't the Fed print money and give it away to everyone. The answer is the Fed has no power to give away money to consumers, and even IF they had that power they would not do it. The reason is people would pay off their loans and banks do not want to be paid back with cheaper dollars.

The Fed will not act against its own best interests, and giving money to consumers would be doing just that. That is a practical constraint that nearly everyone misses! Indeed, look who was bailed out, it sure was not consumers, it was banks at consumer expense.

Zero-Bound interest rates is a real constraint. Recently fed Governor Janet Yellen stated the Fed wold lower interest rates if it could. Well it can't!"

http://globaleconomicanalysis.blogspot.com/2009/08/belief-in-wizards-runs-deep.html

[dave]

@dacian,

LOVE the extra added "P".

http://realestate.msn.com/blogs/listedblogpost.aspx?post=1229160&_blg=1,1229160

Shows that it’s helpful to have friends at the Fed & The Treasury that one can lobby to rescue one from bad derivative investments.

Is it true that they installed three balls above the Fed entrance ?