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Wednesday, February 1, 2012
Buy Gold and Silver!!
The U.S. dollar has enjoyed a rally since the middle of last year, partly as a result of the debt crisis erupting in Europe, taking the problems of the dollar out of the headlines. However, there are good reasons to believe that this rally is soon coming to an end as the dollar is back under attack again. First, Iran and India announced that they will start trading crude oil using gold instead of dollars. Then shortly after the Fed announced that it is going to keep interest rates low until 2014.
The announcement of the Iranian and Indian oil for gold exchange was a direct response to the sanctions put on by the United States and the European Union. The official line has been that Tehran must be punished for its ambitions to develop a nuclear weapon. This punishment has been in the form of sanctions against Iran's oil exports, and now further sanctions against its central bank.
These sanctions are nothing short of financial warfare. This latest sanction against Iran's central bank caused an immediate shortage of dollars, and as a result, the Iranian rial plummet 40% overnight, causing hyperinflation. But, for every action, there is a reaction and Iran retaliated by announcing that it will use gold as an alternative payment system. India has a large amount of gold and it is willing to trade it in exchange for oil.
These actions taken by Iran and India are not enough to severely damage to the dollar. The damage would come if this development becomes a trend and other countries follow suit. It would substantially hurt the dollar if large economies like China and Russia abandon the U.S. dollar payment system and use alternative payment methods like gold or commodities; effectively bringing an end to the dollar as the world's reserve currency.
With the U.S. dollar (UUP) under attack by the Fed domestically and by foreign nations overseas the dollar will continue to decline in value. I suggest investors seek safety in tangible goods such as physical gold and silver, and to some lesser extent financial instruments such as SPDR Gold Trust ETF (GLD), iShares Silver Trust ETF (SLV), and senior gold mining stocks like Barrick Gold Corporation (ABX), Goldcorp (GG), Newmont Mining (NEM), New Gold Inc, (NGD) and Yamana Gold (AUY).