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Tuesday, March 1, 2011
Did you notice the U.S. dollar changed in the last few weeks?
I don't mean that it changed colors, has new security features, or has different words.
I mean something far more important... I'm talking about the way the U.S. dollar acts in the world.
You see, in the past, without fail, the U.S. dollar has been what the Big Money runs to in a crisis. Always.
Always, that is, until this latest crisis in the Middle East. In this crisis, the dollar is down.
Let's figure out what's going on here...
Let me explain why the Big Money has historically run to dollars first... And then we'll consider why the Big Money might not do that in the future... starting with this current crisis.
It's a subtle change in the world. But if it's true, the implications are quite serious... If foreigners don't want dollars in a crisis, when do they want them?
And do foreigners not want dollars anymore? With all the debt we're ringing up, you can easily understand why other countries wouldn't want to own dollars.
The thing is, we need foreigners to buy them... badly...
If they're not interested in putting dollars in the bank here (or more correctly, if they're not interested in buying U.S. Treasury bonds anymore), interest rates in the U.S. would soar, at the very least. And that alone would be a bad thing for the economy.
So let's take a look...
Why does the U.S. dollar go up when the Big Money gets scared? My good friend Jeff Clark explained it best in a recent DailyWealth:
When terrorists flew planes into the World Trade Center, the dollar rallied 8% in six weeks.
When Lehman Brothers went belly-up, and the U.S. banking system was on the verge of imploding, the dollar jumped 10% in 10 weeks.
And last May, when a few algorithmic programs made computer trading go nuts on the New York Stock Exchange – resulting in a 1,000-point drop and recovery in the Dow in 15 minutes – it sparked an 8% rally in the dollar over the following six weeks.
How did gold do during those times? I don't know... I didn't check.
All I know is, I've never had a problem exchanging dollars for any sort of goods or services. It didn't matter where in the world I was at the time. If I needed help, a greasy palm full of greenbacks always did the trick.
Is it different this time around?
In this current crisis in the Middle East, the dollar has gone down in value...
In this crisis, instead of fleeing to the safety of dollars, investors have pushed the price of gold up, and silver has soared.
Are gold and silver the new safe havens for the Big Money? It's been decades since that was the case. But it may be the case again now.
Another explanation here is that Tunisia, Egypt, and Libya don't matter in the world of high finance... They don't matter enough to move the Big Money's needle. They don't matter enough to send the Big Money rushing for safety.
That might sound harsh. But when it comes to global economic growth, those three countries are barely a rounding error...
Let's put it in perspective... When Europe's banking system is crashing, the Big Money rushes to the dollar. But when Libya is collapsing, it's basically irrelevant... The Big Money's assets in London and New York are unaffected, and that's what the Big Money is concerned about.
So which is it? Why has the dollar weakened in this crisis? Is it because the Big Money has chosen gold and silver? Or is it because the Big Money isn't rushing for safety – yet – because of this current crisis?
Personally, I think it's the latter... The Big Money isn't losing sleep over Libya... but is still buying precious metals instead, in a big way.
I could be wrong, though. This could be the first moment – in a very long time – in which the Big Money does NOT flee to dollars in crisis.
If that's true, it could kick off a terrible sequence of events... including a big fall in the dollar and much higher interest rates.
Maybe it's the end of the era... The end of the time when the dollar is the Big Money's safe-haven asset.
But I don't believe we're there... yet.
How will we know if the dollar's reign is over?
If the situation in the Middle East really turns into something that will affect the global economy... and the dollar STILL doesn't rally.
I am watching this closely... and will keep you informed once I have more certainty about the situation.
"The End of America isn't 'out there.' It's right here, right now," Dan Ferris writes. "The question isn't what will you do if it gets here, it's what are you doing now that it's here." Don't miss what Dan calls The Ultimate Portfolio to Protect Yourself from the "End of America" Scenario.
Porter Stansberry has been driving the "End of America" train for some time now. "Debts of this size simply cannot be financed, let alone repaid," he writes. "The first step in this great unraveling is underway – the collapse of the euro." Get his suggestions for preparing yourself here: How to Protect Your Family and Wealth from the End of America.
IT'S VOLATILE, BUT IT'S A BULL MARKET!
It's gut-wrenching, but it's a bull market in biotech...
Longtime DailyWealth readers know we keep a close eye on the biotech space... It's one of the greatest "boom and bust" sectors known to man... and a good friend to the trader.
The biotech sector shares many characteristics with the resource sector. Like mining exploration firms, many biotechs burn through cash in search of the "next big thing." When a firm strikes it rich, the returns can easily go into the thousands of percent. For this reason, both sectors tend to draw in "hot money" every few years to go through huge speculative booms... which are followed by big busts.
Our chart below displays trading action over the last two-years in big biotech fund XBI. This fund is a way to take a diversified position in some of the most important biotech companies in America. As you can see, this fund is locked in a bullish series of "higher highs and higher lows" and sits near a 52-week high right now. This series is full of volatile ups and downs, but it's a bull market. Stay long biotech!
In The Daily Crux