I have been reading headlines about an imminent decline of the U.S. dollar.  A few of these have come from websites selling gold, so that isn’t surprising.  But there have been some similar pieces from more establishment outlets.

These articles are not talking about the dollar declining 5% against other major currencies. They are talking about a massive fall.  They sometimes use the word “collapse”.  Or they say that the dollar will no longer exist in a few years.

There was one article posted on MarketWatch and linked to by the Drudge Report.  The link was titled, “Decline of dollar could happen at ‘warp speed’”. While the article was about a senior fellow at Yale University, it is still significant that MarketWatch is posting articles like this.

In the case of the MarketWatch article, it cites Stephen Roach as calling “for the dollar to soon decline 35% against its major rivals”.  This was one of the more mild predictions in terms of predicting a massive decline in the dollar.

I think this is unlikely to happen.  The U.S. dollar is still seen as something of a safe haven.  U.S. Treasury bills are still seen as a safe haven.  I realize this can change quite quickly, and we really are in unprecedented times, especially when it comes to the Fed’s balance sheet and the size of the deficit.

Here is the problem. The predicted decline is mostly coming in the form of comparing the U.S. dollar to the other major currencies. All of the other major central banks are also engaging in massive monetary inflation.  It doesn’t matter if you look at the Bank of Japan or the People’s Bank of China or the European Central Bank.  They are all inflating.

If someone predicts that the U.S. dollar may decline by 35% against the Swiss franc or the Canadian dollar or the Singapore dollar, then maybe I am open to the suggestion. But this wouldn’t be that significant because these are all coming from relatively small countries.  Even with that, I don’t see the dollar declining by 35% against these smaller currencies within the near future.

The World’s Reserve Currency

I think the big thing that separates the U.S. dollar from the other major currencies is that the dollar is still considered the world’s reserve currency.  There is a reason that foreign central banks, particularly Japan and China, buy so much U.S. government debt.

If this status reverses, then it is possible the dollar could decline significantly.  But I certainly don’t see that happening right now.

I have said for a while now that if the dollar is going to lose its status as the world’s reserve currency, then I don’t think any other fiat currency is going to replace it. The euro or yen is not going to become the next reserve currency of the world.  People, businesses, and governments will just trade using the currency of their country or the currency of the country with whom they are trading. If China wants to buy oil from Russia, there is no need to convert their currency into U.S. dollars to make the transaction.

If the U.S. dollar loses its status as the world’s reserve currency quickly, then maybe we’ll see something of a significant decline of the dollar.  But if this happens, maybe the Fed will tighten its policy. I don’t see the other major central banks having any intention of having a tight monetary policy any time soon.

There is one thing where the dollar will likely decline by 35%.

Gold

Gold is now close to hitting its all-time high.  Unless the Fed slams on the monetary brakes and allows a massive depression in the near future, then I don’t see gold slowing down.  There will certainly be pullbacks, but the general trend is likely to stay up.

The dollar doesn’t have to decline at all against the other major currencies, yet we could still see gold go up by 35%; or more accurately, see the dollar go down by 35%.  The rise in the price of gold may end up being higher in terms of euros.

This is really the key indicator.  Of course, the dollar will decline 35% or more against a lot of things over the next few years. This could include food and water and electricity.  Maybe it will include housing.  Maybe the dollar will decline a lot against fine art.

While I think it is important for individuals to have some liquidity, I highly recommend some diversification outside of the dollar.  This doesn’t mean investing in other fiat currencies.  It means investing in hard assets that can’t be devalued by a printing press or the digital equivalent used by central banks.

If the dollar is going to collapse against anything, it will be hard assets.  Gold, and likely silver, will be especially high in demand.  These are historically forms of money.  Gold is still held by central banks.

Gold is going up now even with stocks booming once again and with U.S. Treasury bills and bonds staying high in demand.  Imagine if stocks fall out of favor and interest rates shoot higher.  Gold is going to be an obvious place for investors to turn to.  And the gold market is much smaller than stocks and bonds right now, so it won’t take a huge percentage of people jumping into gold to make it move in price.

In conclusion, I don’t think the U.S. dollar is going to decline significantly against other major currencies.  But even if I’m wrong, I don’t really care much.  All of the major fiat currencies are especially bad these days.

The major decline will come against hard assets, but particularly gold.  I will be surprised if the dollar doesn’t decline against gold by at least 35% in the next couple of years.