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John Mauldin: “The Euro is not a currency, it is an experiment”

16 January 2010 136 views No CommentEmail This Post Email This Post

John Mauldin is an investment adviser for wealthy individuals. He has a fantastic free weekly newsletter where he deconstructs the political-economic environment and offers good advice on where to invest. He is also a big proponent of owning gold. Here’s his reasoning:

Why would anyone want to be long the dollar or treasuries? The dollar may be the worst currency in the world, except for all the others. What’s an emerging-market central banker to do? Where do you put your reserves?

The dollar? With large fiscal deficits and low interest rates? “What are my other choices?” they must be asking themselves. The euro? Really? The euro is not a currency, it is an experiment.

Everyone knows the problems of Greece. There is no political will in the country (so far) to do what Ireland has done, and really cut their budget. I think Spain is an even bigger nightmare for the EU when compared to relatively small Greece. Italy? Belgium? Portugal? All those countries (and their voters) will be watching to see how the EU deals with Greece. The potential for volatility in the euro is just huge. I hope the euro survives. The world is better off with the euro. But there are very large pressures facing the Eurozone.

And what about the British pound? Already down 20% (a little relief for my London trip next week!), and their problems are every bit as large as those in the US. What about the yen? The government has let it be known they are not happy with the rise in the yen, and seem ready to actually do something about it.

What about the Renminbi? Oh, wait, you can’t get enough of them, and the Chinese manipulate their currency. Same for most other Asian currencies.

The dollar may rise against the major currencies during the first part of the year. As I wrote weeks ago, world trade is slowly picking up. While that growth has not been very visible in the US, it is becoming evident among the emerging-market countries that were not overly leveraged when the crisis began. And trade is still in dollars.

Businesses sold their dollars during the crisis, as they did not need them for trade. But now, with trade picking up, they once again have to buy dollars. That is one reason for the recent bull market in dollars. The other is that the markets are massively short the dollar. When everyone is on the same side of a trade, that trade may have run its course, at least for a while. And that seems to be the case recently for the dollar.

So, where are the strong currencies going forward? The Canadian dollar is on its way to parity. I would want to own the Aussie, if I was a trader. Maybe the Swiss franc, although it is so high on a parity-value basis right now.

But the currency I want the most if I am a central banker is that barbaric yellow relic, gold. Just as India has recently bought 200 tons of gold, I think central banks in other emerging nations will want to buy more, too. They all have relatively little gold as a percentage of their reserves. Look for that to change.

I also like gold in terms of the euro, the pound, and the yen – more than I like it in terms of the US dollar, but even there I like gold long-term, at least until we get some fiscal sanity.

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