In recent days, several well-noted investment authorities called the public’s attention to the future Dollar demise. Warren Buffet, perhaps the most famous investment guru of our time, chose The New York Times to express his worries.
In an op-ed piece called “The Greenback Effect,” Buffett concentrated on the consequences of our unprecedented levels of debt and loose monetary policy. His opinion should not surprise you: he thinks that these policy actions, while necessary, will have destructive inflationary side effects down the road.
Fiscally, Buffett says, we are in uncharted territory. Federal debt levels are going up, and, while we may not have reached the tipping point yet, sooner or later the ballooning national debt is going to call into question our country’s ability to honor all this debt. This will inevitably impact the value of the dollar.
As everything he does, Buffett makes understanding the numbers seem easy: Even if other sovereign nations buy $400 billion worth of Treasuries, and Americans saved $500 billion and invest them in Treasuries, the Treasury Department would still need another $900 billion to finance the rest of the $1.8 trillion it’s issuing this year. The flood of dollar supply will threaten to erode its value. Our beloved Dollar is on shaky ground.
Another argument was brought up by PIMCO, the manager of the world’s largest fixed income fund. The declining value of the dollar, they argue, will be caused by the loss of its status as the world currency. Our readers know that we have been concerned about this possibility for a while. China, joined by other countries, has been calling for a creation of new global currency to serve as a reserve currency.
These worries can be confirmed by the way gold, the ultimate dollar hedge, has been acting. Despite the dramatic decline in end-use demand (for jewelry, electronics and the like), which in the last quarter fell to the lowest level in six years, gold prices were relatively stable. One of the reasons: a dramatic increase in investment demand. Investors bought more than 222 tons of gold in the period, a 46 percent increase year-over-year, as they opted for safety.
Further helping the case for gold is the fact that central banks, traditionally the largest suppliers of gold, are now engaged in less selling. In the first six months of the year, the banks have only sold 39 tons of gold, the lowest amount since 1944, and about a 73 percent reduction compared to the same period last year. For the first time since at least 2000, according to the World Gold Council, central banks were net gold buyers. In a recent renewal of a Central Bank Gold Agreement signed by 18 central banks, the annual gold sales limit was set at 400 tons, a 20 percent reduction from the previous limit. Going forward, we can expect to see a reduced supply on the gold market from the so-called official sector, giving the metal additional support.
Oil rallied sharply yesterday as the Department of Energy reported that U.S. oil inventories fell by more than 8 million barrels during last week. It was the biggest weekly drop in more than a year. Imports now stand at the lowest level since last September.
U.S. oil demand has also improved, according to the American Petroleum Institute. July oil product deliveries fell 3 percent compared to year-ago levels, slowing the rate of decline by half compared with the first half of the year. July crude oil production for the U.S. dropped for the first time since October as pipeline maintenance slowed production in Alaska. The average utilization rate at U.S. refineries, at 84 percent of capacity, in July was at the second highest level since November, and remained nearly 20 percentage points above the average utilization rate across all U.S. manufacturing industries. Overall, the action in oil prices is just a reminder of how responsive they are to even small signs of a potential demand increase.
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