Tags: us | dollar | haven | gold

Investors Flock Back to US Dollar as Global Woes Mount

Wednesday, 16 May 2012 11:12 AM

The escalating Greek debt crisis and spotty but sustained U.S. economic recovery have investors viewing the greenback as a safe haven these days, which has gold losing its luster.

In Europe, a two-year debt crisis is set to explode now that Greece appears closer to exiting the currency zone.

Political parties in Athens remain unable to form a coalition government in wake of recent parliamentary elections that gave leftist and other fringe parties greater power.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

A new round of elections will likely take place in June, but many fear that fringe political parties will muster enough votes to create a government that opposes austerity measures such as tax hikes, spending cuts and public-sector layoffs.

Greece has agreed to austerity measures in exchange for bailout money arranged by the European Commission, the European Central Bank and the International Monetary Fund, but a policy about-face may prompt the three multilateral organizations to halt rescue funding for Athens.

As a result, the country defaults and exits the eurozone, putting pressure on larger countries like Spain and Portugal to follow suit.

Such uncertainty has sent investors worldwide stocking up on dollar positions due to the size, liquidity and safety of U.S. markets.

Consequently, the dollar's traditional hedge, gold, has tanked, falling from a peak of more than $1,920 an ounce in September 2011 to around $1,550 an ounce early Wednesday, and some further declines are on the way.

"It's difficult to see a turnaround just yet. There will be one, but I don't think this is the time, just when we are in the eye of the storm," Societe Generale analyst Robin Bhar tells Reuters.

"Clearly, with people staring into the abyss, it could (fall) $50 or even $100 lower as it washes out. That is the unpredictability of it all and as equities fall, as the Greeks take money out of the banks and the banking sector collapses, I suppose you'd have to be wary of further price falls just to cover for losses in other markets."

Greek Central Bank Chief George Provopoulos has reportedly said savers yanked the euro equivalent of $894 million out of the country's banks now that a new round of elections looms, according to Reuters.

The euro remains weaker against the dollar, down 1.63 percent since Dec. 30 after and down 5.49 percent from its peak between year-end and early Wednesday, reflecting a volatile trading pattern.

Supporting the greenback are improving economic indicators in the U.S.

While monthly unemployment data continues to disappoint, consumer sentiment figures, manufacturing numbers and other data have surprised, suggesting the economy is moving forward even at a slow pace.

Words of caution

For some, however, the dollar isn't the healthy asset that everybody thinks it is, although it does represent a good short-term safe haven play merely because everyone is buying it, says international investor Jim Rogers.

The U.S. economy is awash in liquidity, is home to near zero interest rates and is running massive deficits itself, which would normally weaken the currency.

"It's a horrible currency to own, but I own it," Rogers tells CNBC.

"In times of turmoil, such as in Europe, everybody flees into the dollar. It's the wrong thing to do. It's not a safe haven, but everybody thinks it is so I own it, too," Rogers says.

"I own more dollars now than I've owned in years."

For Rogers, loose monetary policies will keep the dollar weak in the longer term despite recent gains.

Since the downturn, the Federal Reserve has pumped trillions of dollars into the financial system with the aim of stimulating investment and hiring, a policy tool known as quantitative easing that weakens the dollar in exchange for more robust economic activity.

Turning to gold, Rogers says recent price declines were normal anyway, as the asset was due for a correction anyway.

"Gold has been up for 11 years in a row. It should correct," he says.

Gold is dropping not only due to the stronger dollar but also due to import curbs in India, one of the world's largest consumers, as part of a measure there to narrow the country's trade deficits.

Long-term, agricultural investments look solid, including owning productive land, Rogers adds.

Turning to equities, Rogers says he owns very little — none in American companies — and doesn't expect a surge of retail investors to return to the stock market.

"Volume is not going to come back. Finance had a great 30 years. That's finished," Rogers says.

"Learn to drive a tractor if nothing else," Rogers says, referring to his bullish view on the agricultural sector.

The country also needs to brace itself for a fresh recession in 2013 or 2014, Rogers adds.

"In America, we've had recessions every four to six years since the beginning of the Republic. Next year is four to six years."

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

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Wednesday, 16 May 2012 11:12 AM
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