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Dollar-Based Global System Is Ending

11/10/2010 1:00 pm EST


Mark Leibovit

Chief Market Strategist,

Mark Leibovit, chief market strategist with, says the weakness of the dollar and the strength of gold signal a major shift underway in the international monetary system.

The fact that the precious metals rallied to new highs across the board despite the strong dollar [earlier this week] shows the underlying strength of this bull market. The Federal Reserve will be creating $600 billion of new money and, even though the dollar rallied, this is creating a floor for the metals, which are now acting as the reserve currency of the world. The world's 40-year experiment with a dollar-based system may be ending sooner rather than later.

The president of the World Bank, [Robert Zoellick, wrote in the Financial Times (registration required)] Monday that the Group of 20 leading economies should consider adopting a global reserve currency based on gold as part of structural reforms to the world's foreign-exchange regime.

"Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today," he wrote. Zoellick said a return to some sort of currency link to gold would be "practical and feasible, not radical."

Gold is on track to rise to $1,650 an ounce over the next 12 months, and could surpass that level, analysts at Goldman Sachs said in a note to clients Friday. [Last] week's rally moved "gold prices more in line with the low US real interest rate environment," the analysts said.

Prices are near Goldman's three-month target of $1,400 an ounce and will continue to rise to meet the firm's 12-month price target of $1,650 "as US monetary policy remains accommodative and US real interest rates remain low," they said.

The chairman of the Federal Reserve denied Saturday that he's trying to increase inflation as a means to help the US economy grow. Some Fed critics have accused the bank of pursuing an inflationary strategy by adding trillions of dollars of credit into the nation's financial system.

The Fed itself seemed to suggest inflation was too low in a policy statement two months ago. Yet Ben Bernanke said Saturday that the central bank's decision this week to purchase $600 billion in Treasury bonds is solely aimed at keeping US interest rates low so the economy can grow.

Renewed worries about Ireland's ability to finance and control its deficit [caused] spreads on Irish five-year sovereign credit default swaps [to rise] to 598.6 basis points Monday, up from 578.3 basis points on Friday, according to data provider CMA Datavision.

"As European peripherals such as Ireland and Greece continue to simmer on the back burner, it may be only a matter of time before European sovereign debt problems once again capture the markets' attention," said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon.

Spreads on Portuguese [credit default swaps] also widened to a record, recently trading at 465.1 basis points, up from 445.3 basis points on Friday.

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