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Marc Chandler, chief currency strategist at Brown
Brother Harriman (Chandler): I think it’s always possible that
something like this could happen, but we think that the odds of it are very
slim. In fact, when you look at the Saudi peninsula and the six gulf community
council members, only one of them has shifted out of the dollar, and they really
shifted to a basket Kuwait. They shifted to a basket where the dollar played a
very large role.
What these countries are doing, they got a lot of their
income, of course, by selling oil and getting dollars. A lot of their
investments are in dollars, so for them to break the peg with the dollar, for
them to see a major revaluation of the old currencies would cause some hardship
out of their holdings.
Most recently, the gulf community has reiterated
that they will stick to the dollar pegs, and what they’re playing for is in
2010, adopting a single currency. It’s interesting; what happened is, a Saudi
official, who runs their central bank called the Monetary Authority, went to
Europe in the middle of February, and it was a perfect forum for him to say,
“I’m going to be adopting your currency,” but instead he said, “We thought the
dollar was a good purchase,” and the Kuwaitian investment authority, which is
the second-largest sovereign wealth fund, said the same thing.
So I see
no sign that they’re about to decouple from the dollar or break their pegs.
Norman: Well that’s good news, I
guess, if you’re optimistic on the dollar’s fortunes in the medium to long term.
Let’s talk about another market, which is gold.
Historically, people say
there is a link between the dollar’s exchange rate and gold. We’ve seen gold go
up to record levels now in parallel with this decline with the dollar. How tight
is that relationship?
Chandler: Well,
it’s hard to talk about the dollar in general. We have to look at individual
currencies and look at how they relate to gold. What I show in my work is that
the euro over the last year and a half, two years, roughly moves the same
direction as gold about 65% of the time. I think what happens is that when
people want to get out of the dollar, when they’re afraid the dollar is
collapsing, they look for the deep alternative, the euro, which has an economy
and deep capital markets roughly the same as the U.S.
Gold is another
alternative to paper assets. The money that we have is not backed by gold or
silver the way it used to be. So because of that, sometimes people get
frustrated or worried about the value of paper assets in general, so gold seems
to be a good alternative, especially for those people who live in countries that
have weak banks.
Remember what happened to us in the early ’70s: We had
the dollars pegged to gold; everybody else is pegged to the dollar. Our friends
the Europeans say they want to get more gold than the U.S. is willing to part
with, and so their desire to hoard gold helped collapse the Bretton Woods system. Now, say 30 years later, the
Europeans say they have too much gold, so throughout this whole rally in gold,
the European central banks have been diversifying, selling off their gold to buy
assets that give it yield stream.
So I think that in general, for
investors who have a view on gold – maybe supply-and-demand considerations –
they should be buying that. If they have a view on the euro, they should be
trading the euro. The relationship – even when we say a 65% correlation – that
means that in a two-week period of time, there’ll be four days at least when the
two don’t move in the same direction. It can be very costly for short-term
traders.
Norman: Absolutely. Let’s
talk about one aspect of the market that I find curious, as somebody who’s been
trading in it for almost thirty years. During the entire span of the current
administration, the Bush administration, we have seen no intervention. I don’t
think there’s been a period like that in the last 30 or 40 years. Do you expect
to see central banks come in as a counterbalancing force at all ever again?
Chandler: Well, perhaps again sometime, but
not right now; not under this president. I think you’re right. President Bush is
the first president who has not intervened in the foreign exchange market since
at least the end of Bretton Woods and probably even before that. I think that
that means a couple things. One, the bar for intervention is quite high.
Secondly, that so far the falling dollar, the weakness of the dollar has
been a free ride for the U.S. It hasn’t really boosted U.S. inflation, it hasn’t
deterred foreigners from buying our assets, our assets are outperforming in the
last six months, there has been no cost to a weaker dollar, and on the margins,
it helps exports.
So the U.S. has no incentive to really intervene, and if
the Europeans are worried, there are two things that they could do: cut rates,
change their rhetoric.
Norman:
Absolutely. All right, well that’s great. I really appreciate having you here,
and hopefully you’ll come back again. That’s it for now. Don’t forget to stop by
our website often, HardAssetsInvestor.com, right here for our continuing
interview series. This is Mike Norman of the Economic Contrarian; see you next
time. |
