The Dollar versus the Ruble, a very interesting comparison.
December 16, 2014 Castries, Saint Lucia
Last night, the Russian central bank announced a shock decision to hike up its key interest rate from 10.5% to 17%, effective immediately. Incredible.
On Monday alone the ruble declined more than 9% against the dollar, and almost 50% in 2014. It looks like a massacre.
If you listen to conventional financial news, they�ll all tell you that you�d have to be insane to own anything in Russia right now�stocks, bonds, currency, etc.
They�ll tell you that the ruble is in freefall, and that the dollar is the place to be.
But if you have been a reader of this column for any length of time, you know that I am a very data-driven person.
So� just for kicks, I decided to dive into the numbers and make an objective comparison between the US dollar and the Russian ruble.
The results might surprise you.
First of all, I start off with the premise that ALL paper currencies are fundamentally flawed.
Our global monetary system is absurd�the idea of letting unelected central bankers conjure as much money as they want to out of thin air is simply insane.
But it is true that some fiat currencies have better fundamentals than others. And if you want to understand the health of a currency, it�s imperative to look at the ISSUER of that currency, i.e. the central bank.
As with any bank, one of the most important metrics in determining a central bank�s financial health is its level of solvency.
Specifically we look at the bank�s capital (i.e. net assets) as a percentage of its total balance sheet.
The US Federal Reserve only has a basic capital ratio of 1.26%. Talk about razor thin. (This is down from 4.5% just a few years ago)
That means if the value of the Fed�s assets declines by only 1.26%, the issuer of the world�s dominant reserve currency becomes insolvent.
Now, what happens to the liabilities of an insolvent entity? They decrease in value. Just like how Greek bonds (the liabilities of the Greek government) collapsed a few years ago.
What are the Fed�s liabilities? Open your wallet. Those green pieces of paper aren�t �dollars�. Just look. They have �Federal Reserve Note� (i.e. debt) printed on them.
So the Fed�s pitiful financial condition directly affects the value of the dollar over the long-term.
On the other hand, the Russian central bank�s ratio is 12.5%�literally almost TEN TIMES GREATER than the Fed.
Capital cushion is crucial because when the unsuspected happens, this is what can help keep you afloat.
Think about it: you might be able to keep going without savings, perhaps even accumulating debt, but only until something happens out of the blue.
Until your car breaks down, or you need to go to the hospital, for example. Then all of a sudden, your lack of capital can become a serious issue.
Another important metric is gold. As I mentioned, since all fiat currencies are fundamentally flawed, it�s important to see the amount of REAL ASSETS that a central bank holds in reserve.
To make an apples-to-apples comparison, we look at a central bank�s GOLD reserves as a percentage of the money supply, i.e. how much gold backs the money supply.
In Russia, it�s 6.2%. And rising. Last year it was 5.5%, and the central bank is continuing to heavily stockpile more.
How much gold backs the dollar?
Precisely zero point zero percent. Zilch. Nada.
The Fed doesn�t own gold. It loudly proclaims this on its own website: �The Federal Reserve does not own gold.�
It holds �certificates� which are redeemable for US dollars. But there�s not a single ounce of gold backing the US dollar.
So� with no gold and pitifully razor thin solvency levels, it really wouldn�t take much of a shock to topple the dollar.
By comparison, the ruble is much better capitalized and actually has something backing it.
Now, I�m not necessarily advocating to buy the ruble, but hard, publicly available numbers clearly demonstrate the discrepancy between �sentiment� and objective data.
And at a time when the ruble and the whole Russian economy have been beaten down so much that Apple alone is now worth more than the whole Russian stock market, Russian assets certainly make for an interesting speculation.
The bottom line, however, is�if you wouldn�t own the ruble, then what are you doing holding 100% of your assets in the dollar?
Sovereign Man�s Tim Staermose is currently on the ground in Sydney and was literally a block away when yesterday�s tragic events unfolded. Here�s his first hand account.
Until tomorrow,
Simon Black Founder, SovereignMan.com
Jim Sinclair�s Commentary
Compared to the Talking Heads, this is blasphemy.
Done in Convention by the Unanimous Consent of the States present the Seventeenth Day of September in the Year of our Lord one thousand seven hundred and Eighty seven.
RW, your article is written by the same guy who predicted $50,000.00 per ounce gold back in March of this year.
He's a kook.
Well, he may be a kook and so on and so forth. But it seems that two points the article makes are quite sound, even if he is a kook.
The first is the shakiness of fiat currencies. There is no doubt that value of the dollar has depreciated greatly over the years. That trend to devaluation will continue and the kook is quite correct about that. The "when" and the "how bad" are uncertain but the "direction" is clear and it is down. In the short term, the dollar may go up but then it will resume its decline for sure.
The second point of the article is simply one of diversification to investments other than the dollar. Again, quite sound.
TF
The tax collector said: “Lord Jesus, have mercy on me, a sinner.” Jesus said he went home “justified.”
When I was a youngin' I could purchase a gallon of gasoline for 2 silver dimes. Todays melt value for two silver dimes according to coinflation.com is approximately $1.16 each, with gas here at $2.36 per gallon today, I can still purchase in a round about way, a gallon of gas for two silver dimes. The very reason to keep some silver and gold IMHO, though I do agree, that you can't eat it.
Take your kids and your grand kids huntin' and shootin'.
Gold Standard has failed 3 times in the last 200 years, it is NOT a flawless system. Value is ALWAYS in the mind of the people, that's the fundamental truth of ANY currency. Once the people are no longer interested in following your "rules" it failes; even if it's gold.
The Gold Standard failed in the 1860's, it failed at the turn of the 20th century, and it failed in the early 1920's. Three such failures is why the entire world abandoned the gold standard. The gold standard doesn't allow for ANY currency manipulation in times of crisis. People see the words "currency manipulation" and just assume it's some sort of scam, but it's sound financial process that has proven to work time and time again to stave off the huge failures of the gold standard. You gotta ask yourself, if the Gold Standard is so great, why was it abandoned by literally every nation in the world? There are HUGE problems with the Gold Standard.
Fiat currency offers a lot of options that gold doesn't have, but a fiat currency, like gold is based on perception of value. If the perception of value is eroded, then it's game over...and it doesn't matter what standard you're on then.
Have there been any fiat currencies that have not failed in the past?
There certainly have, no doubt. Ours nearly failed during the Great Depression. The difference mostly, fiat currency gives you the ability to make changes to ward off smaller issues before they become bigger issues. Gold standard doesn't allow for that. Gold standard tends to work very well when things are going well. It's when all hell breaks loose that it tends to fail.
The big problem with a gold standard failure is, it tends to go worldwide when it does fail; and that you don't see with a fiat currency (but could happen now that the Euro exists).
But to be honest, there is no perfect currency system and there never will be. Because its all based on a perceived value.
The failure of the gold standard in the '20's started in Germany in 1919. Germany had depleted the bulk of their gold during WWII (much of which ended up in US banks; we held nearly 2/3 of the world�s gold at the end of WWI). So the gold that existed in German banks didn�t reflect the GDP of Germany at all. Meaning, if you were to pay the German workers what they were owed, in D- Marks, there wasn�t enough currency to go around. The system was completely out of balance and became irrelevant. So the German public dumped it and began using Pound Sterling and the Franc. Eventually over the next two years that failure would happen in London and Paris, and eventually all of Europe. The only country that had enough gold at that time was the US (actually we had a huge surplus, and had to take a good deal of gold out of circulation); we were the only nation that had gold in sufficient quantities to cover payroll for all of America. This is right about the time that gold mining production stopped matching worldwide growth of currency also.
RW, your article is written by the same guy who predicted $50,000.00 per ounce gold back in March of this year.
He's a kook.
The author of the specific article? Sinclair did not make such a prediction did he???
Done in Convention by the Unanimous Consent of the States present the Seventeenth Day of September in the Year of our Lord one thousand seven hundred and Eighty seven.
I would have to see more documentation on those events...
Done in Convention by the Unanimous Consent of the States present the Seventeenth Day of September in the Year of our Lord one thousand seven hundred and Eighty seven.
I would have to see more documentation on those events...
It's in books, not little snippets on the internet (or if it is, I don't know where). If you take a macro-economics course, it should be in your text book. Here's the updated version from the class I took: http://www.amazon.com/Macroeconomics-N-Gregory-Mankiw/dp/1429240024
Also Google up the Genoa Conference of 1922 which was a conference on how to return to the gold standard (after its failure)...and in fact lead to the eventual full abandonment of the gold standard. First by not minting gold coin, then by finally just converting to a fiat currency.
Read what I said in my previous post about the 1919 failure in Germany, it makes sense.
Cyprus "bail-in" is the blue print for American asset confiscation when inflation eats out the banks. So says the fellow you call a kook.
And 1974 patterns in gold seem to be exactly what is happening now; manipulate the gold down through naked shorts, coil the spring and then jump on and let it roll on up and make gajillions... I think that is what the banksters are doing now.
You can only manipulate gold down for so long. Cannot do it forever.
Done in Convention by the Unanimous Consent of the States present the Seventeenth Day of September in the Year of our Lord one thousand seven hundred and Eighty seven.
They are not manipulating gold. Gold goes down during a bull market in stocks. Gold won't begin heading north again until interest rates start jumping up quickly.
You didn't use logic or reason to get into this opinion, I cannot use logic or reason to get you out of it.
You cannot over estimate the unimportance of nearly everything. John Maxwell
The Gold standard also failed the Spaniards back in the 1500's. They brought so much gold back from the New World they experienced 500% inflation.
I am going to look hard at the events Gungeek is talking about; but the influx of Gold from the New World is the only real time that I know of that the value of gold went down for actual physcical non-flim-flam reasons.
The Keynsian fiat flim flammers don't want currency tied to reality because governments like creating money out of thin air; but the charade cannot last forever. The only precious metal backing our fiat paper is aircraft grade aluminum formed into B-52 bombers. Folks take our money because we can and do blow folks up.
That is where I am at in my dull world of groping and wandering about in the dark. Gonna go back and re-read "The Case for Gold"
Done in Convention by the Unanimous Consent of the States present the Seventeenth Day of September in the Year of our Lord one thousand seven hundred and Eighty seven.
They are not manipulating gold. Gold goes down during a bull market in stocks. Gold won't begin heading north again until interest rates start jumping up quickly.
At the very beginning of the take down in gold in recent years it all started off by naked short selling. As I recall...
Done in Convention by the Unanimous Consent of the States present the Seventeenth Day of September in the Year of our Lord one thousand seven hundred and Eighty seven.
They are not manipulating gold. Gold goes down during a bull market in stocks. Gold won't begin heading north again until interest rates start jumping up quickly.
Fact of the matter is that the Fed is "in" a number of markets.
Also, you may want to check the correlation of gold and the DOW. Often they move in concert. Depends upon the time period chosen depending on how one desires to promote a premise.
TF
The tax collector said: “Lord Jesus, have mercy on me, a sinner.” Jesus said he went home “justified.”
The Gold standard also failed the Spaniards back in the 1500's. They brought so much gold back from the New World they experienced 500% inflation.
I am going to look hard at the events Gungeek is talking about; but the influx of Gold from the New World is the only real time that I know of that the value of gold went down for actual physcical non-flim-flam reasons.
The Keynsian fiat flim flammers don't want currency tied to reality because governments like creating money out of thin air; but the charade cannot last forever. The only precious metal backing our fiat paper is aircraft grade aluminum formed into B-52 bombers. Folks take our money because we can and do blow folks up.
That is where I am at in my dull world of groping and wandering about in the dark. Gonna go back and re-read "The Case for Gold"
Coming to a theater near you!
My opinion... fwiw...
Gold has over the centuries been considered to be "money." There have been times when it trades erratically. Sometimes it seems to trade as a commodity and is subject to price fluctuations caused by simple supply and demand of the physical metal. Sometimes it trades as a "currency" or as true "money." When it trades as a currency, value moves from fiat to some type of gold investment vehicle. Could be stocks, futures or physical.
In my opinion, the death of the dollar and financial convultions are assured but I only know that it is inevitable and in the future. The forecast of $50,000 per ounce is easily seen as possible BUT before the dollar trades like the ole German mark, our gov't will step in and probably stabilize the world financial system. Check out the SDR. It is already in place and may be used by large corporations and governments to settle debts much like the BIS does now. The "dollar" will likely be stabilized before it devalues too much and be restricted to domestic use only. This means a two tier monetary system...one for the peasants...the dollar... and the SDR for the elites.
Note that the value of the SDR will be a combo of commodities such as oil, a basket of annointed currencies and gold.
TF
btw... check out the long term relationship between gold and a barrel of oil. An ounce of gold, over longer terms, trades for 12-19 times the price of a barrel of oil. Seems to average about 13-14..that it gold at $1400 and oil at $100. When we are out of whack like we are now, there is something big coming and it will likely not make us happier.
The drop in oil price and russian selling of gold lead me to think gold is going lower....gold is overvalued measured against oil .... in the short term.
My forecast? ... gold and oil both going lower then snapping back much higher in later 2015 - early 2016
The tax collector said: “Lord Jesus, have mercy on me, a sinner.” Jesus said he went home “justified.”
