These are good questions- you should post more.
"With everyone and his brother predicting the demise of the American economy and the Dollar, maybe the smart money is betting the opposite."
The smart money has been betting against the US Dollar for about 2-4 years now. The bet has paid off - see USD vs. Gold, USD vs, oil, USD vs. Aussie Dollar, USD vs. UK Pound, USD vs. Copper - incredible ! and others.
To make these bets, many hedge funds and individuals shorted US tresuries of various durations. When these trades are closed, they will be the treasuries to cover the short.
Now some of these bets are being unwound - see USD vs. Gold.
Why ? Here's the sort of reasoning that is involved...
When many of these bets were made, US interest rates were much lower 3.5% - well under most every estimate of inflation or price gain for real commodities. When the bet was made, you might have expected copper to gain 20% that year, with a range for 10% to 35%.
Today, the rate is 5%, and likely to go to 5.5%. We might expect copper to gain 7% for the year, with a range of -10% to + 15%.
Notice we now have some loss possibilites. Also notice the averge gain of 7% is only 2% above the 55 cost. Not much reward, and you have risk of loss.
Since the risk / reward is not good enough, the trade will be closed out, even though the USD may still go down vs. copper.
Closing out the trade often involves buying US treasury paper.
Next you have the question of which currency to hold. The USD is good short term, because some many commodities (oil, gold, copper) are denominated in USD, most derivatives are denominated in USD
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The safety of US treausry paper - the "flight to quality" is also a reason US treasuries are going up in price.
That can be a very powerful driver when fear increases.
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Now I will argue that the predicted death of the US dollar is exaggerated. I expect the USD to loose value long term (maybe 20-30% from today, June 9, 2006), but not fall apart - meaning not down more than 50%. I think this is different from TJ's view, an likely different from SoT's view and Taikun's view.
My time frame is maybe 2-3 years maximum for paper investments, and other people may have long time lines.
My time frame for the physical gold I have is 3 years to maybe 7 years. |
