The Cleanest Dirty Shirt

All modern currencies are fiat. The numeraire of the moment floats in a cesspool of policy designed for management and intervention.

Money and value become hollowed out concepts.

The eventual return to a sound relationship between human productivity and the value of money will be unloved, to say the least.

In the geopolitical front now we are witnessing countries move away from the U.S. Dollar, like Russia (and China more recently).

But we are seeing an aggressive attempt to maintain its influence - often appearing to dovetail with other geopolitical motives.

Case in point:

The recent lawsuit against France's Bank BNP Paribas. BNP’s recent $8.9 billion fine by U.S. regulators came out of nowhere, in spite of BNP not breaking French or European law.

The charge was that the dollar was used to hide proceeds from dealings with Sudan and Iran - both countries under U.S. sanction.

The U.S. "simply" applied domestic legislation to an overseas dollar situation.

As much as this may be tied into terrorism, it a flexing of dollar reserve muscle that is relatively benign, but a flexing nonetheless.

The fine was among the largest imposed on a foreign entity – and, notably, one that did not break any of its own domestic or European laws.

The dollar's demise is a discussion at the heart of precious metals investment.

Change is coming and the dollar fundamentals don't look good.

With a demographically-challenged workforce and immeasurable debt (including unfunded current future obligations in the region of $200 trillion) it is all but inevitable that the value of the U.S. dollar will decline.

At the same time, alternatives to the dollar will emerge. Not all necessarily good ones or commodities-backed.

One-quarter of China's trade is now settled in renminbi, compared with less than 1% as recently as 2009.

While we may be a ways from a renminbi reserve, the option of using it as a settlement currency - excluding the U.S. Dollar - could certainly hold appeal for governments who suffer from dollar-sponsored aggression.

Indeed, in an interview following the BNP case, the Governor of Banque de France stated:

"In any other walk of life, one would expect there to be a degree of diversification; it is ironic that not only does the U.S. enjoy a unique status as the global currency of (enforced) choice, but it is at odds with the economic health underpinning that status."

Contradiction abounds. Increasing numbers of investors (both private and institutional, (as well as some foreign governments purchasing Treasuries) are aware of the dollar's feeble economic underpinnings.  Yet they are drawn to them because of a lack of alternatives.

The only thing good about old age is that it doesn't last very long.

Is this a sign of things to come?

Will all of this lead to any price fluctuation in gold and silver if major countries really did start to refuse the U.S. Dollar?

Ultimately, these Bric- sovereigns are doing the same as any prudent investor.

They are diversifying. Attempting to reduce dollar exposure.

They can't do it too fast or they will miss the opportunity.

Speaking of monetary metals...

Fundamentally, you have to reverse engineer the price you see from the value represented.

But on the margin, price is derived at on precious metals futures market - predominately the COMEX.

And as long as a small group of entities hold many more selling positions relative to a diverse group of long or buying positions, the price is artificial - up or down within this range.

It is one of the few markets - by virtue of what commodity markets evolved to be from the beginning - where you can see the dichotomy.

And it should concern investors from other markets. Very much.

But the majority (even those within the industry itself (are willfully blind to it because all they see is conspiracy, and therefore they cannot take it seriously.

However, the more you recognize this one extreme imbalance -- the easier it is to see these imbalances, bubbles, potential shocks, etc. - everywhere.

Of course it all points back to the largest bubble of all, the financial system, which is a cancerous outgrowth of a monetary experiment gone badly - just as they always (without exception) do…

Eventually we will see the end to the dollar and fall back to commodity currencies, however painful or inconvenient.

The danger is that an organizing body or government will once again decide to what the value should be.

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