Dollar falls, gold rises

Following Robert Fisk’s article in the Independent Tuesday claiming that Arab states—along with China, Russia, Japan and France—are making moves to stop using the U.S. dollar for oil trading, the dollar fell sharply. At the same time, gold prices are reaching record highs.

Despite a number of countries denying the Independent report, “there are probably all sorts of discussions going on about how to reduce dependence on the dollar and diversify reserves,” said pvm analyst David Hufton. “But they are hardly likely to be confirmed given that it would only serve to cut the value of the very reserves countries are seeking to diversify out of.”

Dennis Gartman, a U.S. investment expert, also said that no one should be surprised to hear denials. “We are certain that spokespeople for every single nation will be brought to the fore to deny that any such meetings have occurred, that no such decisions have been made, that it is not in anyone’s interest to have held such meetings or made such decisions,” he told clients as the Independent story broke. “The market will care not a whit.”

The results can already been seen in the falling confidence in the dollar and the flight to gold.

The Independent reported Wednesday,

The price of gold is surging on world markets amid fears that the old economic order based on the supremacy of the U.S. dollar could be breaking down.A new spike has sent the cost of the precious metal to a level not seen before. …Not since the collapse of the Bretton Woods system in 1971 has gold been treated as the equivalent of a world currency, but the Independent reported that it could form part of a basket of currencies that would be used for oil trading by the end of the next decade. …Across the world, investors have been reaching for gold as an alternative to the dollar and to other U.S. assets, fearing that the American currency is headed inexorably lower.The dollar index—which measures the greenback against other currencies—fell 0.7 percent yesterday and the dollar was lower against all major currencies except the British pound. …Overseas governments are in a bind because they hold trillions of dollars as reserves to protect them against a financial crisis. They are seeing the value of those reserves decline, but starting to swap them for gold or other currencies could deluge world markets with unwanted dollars and send the value of the greenback even lower. The situation is particularly sensitive for oil-producing nations, who are paid in dollars for their exports and therefore hold high dollar reserves.Gulf Arabs have begun planning—with China, Russia, Japan and France—to move from dollar dealings for oil to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new currency planned for nations in the Gulf Cooperation Council, which includes Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Denials by the countries involved lessened the story’s impact on the dollar, but, as the Washington Post points out, “the Independent story is almost beside the point: It marks only the latest example of concern over the fate of the dollar. … Nations around the world are losing confidence in the dollar.”

“The U.S. dollar is headed for also-ran status and it will continue to lose its value against many other currencies and assets,” Miller Tabak equity strategist Peter Boockvar said in an interview Tuesday. “The rest of the world wants the U.S. dollar to lose influence, but no one wants it to be abrupt, as it’s in no one’s interest.”

The Washington Post article continues:

The possibly shaky oil story in today’s Independent is only the most recent data point in this discussion. China really started this whole ball rolling in March, calling for the dollar to be replaced as the world’s reserve currency, prompting a quick and panicky response from Treasury Secretary Tim Geithner expressing confidence in the greenback.But other nations followed. Admittedly, some are fringe players. …But others are not fringe players. [I]n September, Russia said it is fine with the dollar as one reserve currency but said others are needed, as well, a move that would diminish the dollar. Speaking at an international investment summit last month, Russian Prime Minister Vladimir Putin criticized America—that means Fed Chairman Ben Bernanke—for “uncontrolled issue of dollars.”Both China and Russia have called for a “global supercurrency,” similar but larger in scale to the euro, that would replace the dollar.In [a] speech [in Washington] last month, [International Monetary Fund President Robert] Zoellick said the dollar is in trouble and likely to lose its place to the euro or the Chinese yuan.”The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency,” Zoellick said. He said the euro provides a “respectable alternative” to the dollar.What does all of this mean to the U.S. consumer?”Imagine all the goods that Wal-Mart sources from overseas and how expensive it might get with a depreciating U.S. dollar,” Boockvar says.Or put it this way: Imagine walking into Wal-Mart and seeing Neiman Marcus prices.

The decline of the U.S. dollar as the world’s primary reserve currency is a trend theTrumpet.com has been watching for some time. “America’s foreign creditors are … questioning the wisdom of holding so many U.S. dollars. And they’re looking for a way out,” Robert Morley wrote in July. Watch for this movement away from the greenback to gather steam. And watch Europe—as its global economic influence increases—to ensure the outcome is to its advantage.