Arabs, Dollars, & Gold

There are reports that Qatar and the United Arab Emirates are considering a plan to drop their currency’s peg to the U.S. dollar. This isn’t particularly surprising; the Fed’s low-rate policy is devaluing the dollar, and doing the same for other currencies that are tied to the dollar. If you adjust for inflation, short-term interest rates in the U.S. are actually negative right now. This seems unlikely to change any time soon — which may be why the U.S. Treasury is actually encouraging the Gulf states to break ties with the dollar.Keeping the dollar weak does have certain advantages, of course. Foreigners are encouraged to buy U.S. exports that are effectively cheaper in terms of other currencies. This is less significant than it used to be, given that much of what the U.S. exports is knowledge (”Intellectual Property” is the buzzword), rather than raw materials or finished goods. Nonetheless, certain states and industries that are highly dependent on exports can bring a lot of political pressure to bear. As a result, it is now the official policy of the U.S. government to devalue our own currency.

Where it all ends is unclear. For generations the U.S. dollar has been the world’s reserve currency. Those days are drawing to a close. What will replace the dollar? I don’t think anyone knows the answer. Pending some kind of global monetary realignment, some international investors are seeking the safety of the one currency that cannot be devalued: gold. Gold has a few industrial uses, but for the most part it is simply a store of value. Unless some modern-day alchemist comes along, the gold supply won’t get any bigger. Instead, each ounce becomes even more precious.

The Gulf states appear to have made a decision about which way to bet. Will they be proven wrong?

Time will tell.