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Trading Lessons

Prepare for This Seismic Currency Shift (and Profit)

Currencies / Forex Trading Jul 14, 2014 - 03:11 PM GMT

By: Money_Morning

Currencies

Peter Krauth writes: We all know the U.S. dollar is the de facto world reserve currency.

And if you've been reading my column for a while, you also know its status is being seriously challenged.

China and Russia have taken the biggest steps to that end so far.


But it seems we may already be in the planning stages to consolidate currencies, with the ultimate goal of establishing a single currency for the entire planet.

Hard to envision, but the signs are there.

That's something not meant to benefit you or me, but there are ways to leverage this intensifying trend to your advantage...

Advice from Chicago That's Sure to Be Followed Globally

"You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before." -Rahm Emanuel

That, I'm afraid, is exactly what will happen when (not if) the next major economic crisis hits. I'd even venture to guess it's Rule No. 1 in the "central planners" rulebook.

Major new laws like FATCA (Foreign Account Tax Compliance Act) and a growing acceptance by major governments of a digital currency, like Bitcoin, are simply setting the stage.

The ultimate goal is to establish and roll out a single, planetary currency regime. There will, quite simply, be no alternative available.

It's all about control.

In 1969 the IMF created an international reserve asset called the SDR (Special Drawing Rights) to support the Bretton Woods fixed exchange rate system then in place. Any IMF member that wanted to participate in the system required official reserves of gold and broadly accepted foreign currencies.

Those assets were to be available to buy up that nation's currency in forex markets in order to help maintain existing (fixed) exchange rates.

However, two of the key reserve assets, gold and the U.S. dollar, were in too short supply to accommodate expanding world trade at the time. So the SDR came to life.

Yet only four years later the Bretton Woods system broke down, especially after Nixon closed the gold window. By March 1973 the world's major currencies were "unpegged" and began to trade freely at market-determined rates against each other.

The SDR's role was severely diminished... for a while.

To save the U.S. dollar's dominant position, Nixon and Kissinger hatched the petrodollar system, guaranteeing a constant and elevated (though artificial) demand for U.S. dollars worldwide.

Consolidating Signs Are Everywhere, but We're Not Worried

China and Russia right now appear to be the biggest threats to U.S. dollar hegemony, a topic I've discussed here and here. An ever-increasing amount of trade and large transactions between China, Russia, and several of their trading partners (swap deals) are taking place in their own currencies, bypassing the U.S. dollar completely.

But another significant trend I see emerging is one of regional currencies. The euro has been around since 1999 and is used today by 23 countries encompassing 334 million Europeans. Another 210 million people use other currencies that are pegged to the euro.

And despite challenges to the euro's integrity, there's considerable political will to ensure its survival. After all, it was Mario Draghi, president of the European Central Bank, who said, "...the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."

With the BRICS currency reserve pool and BRICS Development Bank likely to be officially announced this summer, the foundation's being set for a potential new regional currency for its members in the future.

That could establish a currency to be used by a consolidated 41% of the world's population.

If you add in the portion of the world using the U.S. dollar, the euro, and currencies pegged to these, more than half the world will be using essentially just three different currencies...all of them fiat.

You may think this is all at best "hogwash" or, at worst, a long way off. But the fact is this is being discussed by highly influential political and financial leaders.

In a recent discussion between Ben Davies, CEO of Hinde Capital (a fund manager focused on precious metals) and former Greek Prime Minister George Papandreou, this very topic was raised.

Davies asked Papandreou if, during his tenure, policymakers had "...discussed a change of the monetary order?" Papandreou said they had, and that it included discussion "...about exploring a basket of currencies that could involve an asset like that (gold)".

And the smoking gun? He went on to say that yes, it would be along the lines of the SDR.

Even hedge fund maven George Soros has said in interviews that the international financial system is broken, and we can't afford these imbalances. He goes on to say that we need a new currency system, and the SDRs provide the ingredients.

As it turns out, the IMF increased the amount of SDR allocations to members nearly tenfold to about $316 billion equivalent in the aftermath of the financial crisis.

We already have the Bank for International Settlements (BIS) which acts as the central bank for central banks.

So it's easy to see the SDR as the next logical step for "central planners."

Even James Rickards thinks the future of the international monetary system will be a race to SDRs and gold, but that gold will win it.

Keep in mind, too, the SDR was initially defined as equivalent to 0.888671 grams of fine gold, which was worth one U.S. dollar at the time.

In your quest for profits you could look to make bets on some of the undervalued currencies you'd expect to be part of the SDR as it migrates toward its potential new role as a one world currency. But that involves plenty of speculation and once again fiat currencies that pay little if any interest.

As a twist on playing gold, you may want to consider silver instead. Right now, it's still very cheap relative to gold, and it too has been used as money numerous times throughout history. Since it's cheaper than gold ounce for ounce, it could have a role in smaller value transactions.

Consider the Sprott Physical Silver Trust (NYSE Arca: PSLV), which stores its metal in Canada (not with a bank-owned custodian), offers potential tax advantages for some U.S. investors, and the ability to redeem for physical bullion for a certain minimum value.

In the end, it's a safe bet that "central planners" won't let the next major financial crisis "go to waste." So let's make our play one step ahead of theirs.

I'll keep you up to date on profit opportunities as the situation continues to progess...

Source : http://moneymorning.com/2014/07/14/prepare-for-this-seismic-currency-shift-and-profit/

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