The dollar, commodities and the normalcy bias
- It just can’t happen?
- Of course it can
- Here’s what I’m doing to protect myself today
Most Americans haven’t experienced the Great Depression. Most people have never lived through hyperinflation, or a currency crisis. Most people reading this letter have never experienced a food shortage.
And for the past 100 years or so, the United States has enjoyed reserve currency status.
For a quick tour of what “reserve currency” really means, read this short passage from a story in The Wall Street Journal titled “Why the Dollar’s Reign is Near an End”:
“When a South Korean wine wholesaler wants to import Chilean cabernet, the Korean importer buys U.S. dollars, not pesos, with which to pay the Chilean exporter. Indeed, the dollar is virtually the exclusive vehicle for foreign-exchange transactions between Chile and Korea, despite the fact that less than 20% of the merchandise trade of both countries is with the U.S.
…What's more, what is true of foreign-exchange transactions is true of other international business. The Organization of Petroleum Exporting Countries sets the price of oil in dollars. The dollar is the currency of denomination of half of all international debt securities. More than 60% of the foreign reserves of central banks and governments are in dollars.”
So practically no one in the United States or anywhere else in the developed world, for that matter, even believes in the possibility of another depression, hyperinflation, currency crisis, or food shortages.
They also don’t believe in the possibility of the dollar losing its reserve currency status, a trend that’s compounded by the fact that most people probably don’t know the meaning of the phrase “reserve currency.”
If people did believe in the likelihood of these very real threats, than it’s likely that they would prepare for them, and in preparing for these crises, they would not come to pass.
Voters would demand the abolition of the Federal Reserve, and they’d only vote fiscally conservative candidates into office. They wouldn’t demand endless regulation and “benefits” from their government. They would buy gold and silver, not US Treasuries. They’d save excess capital, not spend themselves into debt.
The likelihood of crisis is increased, in part, because of people’s inability to imagine that it will come to pass, and so prepare for it.
Why prepare for a flood if you don’t think it will rain?
This tendency to discount the likelihood of incidents outside the realm of understanding or experience is known as normalcy bias.
For instance, if on January 1, 2011 I predicted that the Egyptian government would be peacefully overthrown by March 1, 2011, most people would call me crazy.
Mubarak had been in power for 30 years. Why would things change?
It’s that same kind of belief that “things will remain as they are” that prevents most people from taking the few, simple steps to protect themselves from the likelihood of crisis.
This type of thinking also causes people to completely dismiss any evidence that contradicts their view that things will remain the same.
For instance, the price of silver more than tripled in less than three years. Taken at face value, this occurrence should tell you that something is terribly, terribly wrong with either the dollar or the silver markets. We know there’s nothing terribly wrong with the silver markets – no supply disruptions and fairly flat consumption over that time period.
But almost no one comes to the correct conclusion that yes, something is terribly wrong with the dollar.
So what should you do?
I’ve received a smattering of emails from Resource Prospector readers on this very topic. Just yesterday, Vince C. wrote in to ask,
“What do you recommend a retired investor with a couple of million dollars do about your forecast?”
Vince, I can only tell you what I’m doing with my personal situation, and I’ll let you form your own opinions.
First off, I’m getting out of Treasuries entirely. Some folks will probably rightly point out that there’s not really dangerous to be in short-term Treasuries, but I’m avoiding them entirely.
Secondly, I have at least 6-12 months of living expenses saved up in the form of physical gold and silver bullion. I keep it in a safe place, close at hand.
And thirdly, I’m opening up a bank account in a foreign country. Trust me, it took some convincing to get my wife to come around to this idea. Just as it makes sense to invest in a mutual fund for diversification, it makes sense to diversify your cash savings. Why have all your eggs in the dollar-basket when there are plenty of foreign countries where you can open a bank account and have the same relative safety?
I’m also on the lookout for shares of companies that have leveraged upside to higher commodity prices.
Take a look at this report on three of my favorite commodity ETFs to see what kind of upside I’m talking about.
Good investing,
Kevin McElroy
Editor
Resource Prospector
