Liquidity Bailouts And Hong Kong Rumors Reflect Shift To New Monetary Order

The news of a global liquidity bailout -- in which central banks worked together to add US dollar liquidity to help the European banking system -- has helped drive the US dollar much weaker and the Euro stronger in the foreign exchange markets over the past 24 hours. This event is noteworthy because it reveals the simple truth that the entire Western banking and financial system is in an ongoing and overdue process of self-destruction -- an inevitability brought about by its being built atop a debt money standard (in which all money is loaned into existence). As the US dollar and Treasury bond markets are the foundation of this system, it is their collapse that is the big picture driving the global economy. From this perspective, some type of US dollar asset is the asset most worth shorting, with gold being the most worth being long. Indeed, when one examines price movement over the past 10 years, long gold/short US dollar has been one of the best trades one could have made.

As this process is still unfolding, it is the US dollar that will be more debased than any other currency. Accordingly, the primary trend in EURUSD should be bullish. While we have had some significant retracements in the EURUSD exchange rate, we still have not had a monthly close below the 50% retracement of the move from around .8400 to over 1.5800 -- the move from the Euro's inception in 1999 to its all-time high in the summer of 2008.

Yesterday we also got another example of opportunities that may emerge from this big picture transition away from the US dollar as reserve currency. Hedge fund manager Bill Ackman gained headlines for his decision to go long the Hong Kong dollar, on the premise that Hong Kong will sever its peg to the US dollar. Severing of pegs to the US dollar by Asian economies -- specifically satellite economies of China -- is an event symptomatic of the ongoing move to a new global monetary system, in which the US dollar is no longer a primary reserve asset. Western central banks will increasingly peg their currencies and resist free market chaos in the name of preserving stability, while East Asian economies centered around China will increasingly embrace free market principles to assist in their transition to consumption and finance-oriented economies.

Of course, the best and safest opportunity during this transitional time is in gold.