Say what you will about the miserable U.S. dollar. No matter how it has declined over the last three decades, the world still considers the U.S. dollar the best reserve currency (for now).That means central bankers continue to hold dollars in their reserves. It also means the dollar is considered the world’s most convertible currency.
As the most convertible currency, the dollar has the privilege of being the pricing mechanism for most commodities. It also makes the U.S. the unofficial hub of the global commodity markets.
It’s why we have the five biggest commodity future exchanges right here. We have the NYMEX that trades energy. The CBOT and CME trade grains and livestock. The NYBOT trades soft commodities. And the COMEX trades precious metals and copper.
All five future exchanges trade commodities in billions, if not trillions, of U.S. dollars every year. And, these exchanges make money and pay taxes to the U.S. government. It’s a pretty good system for the U.S. government.
Unfortunately, this is all about to change…
Right now, I’m seeing some disturbing new developments in Washington that could ensure global commodity traders will take their business elsewhere, far beyond the U.S. shores.
When that happens, it’s very possible the U.S. could lose one of its biggest assets – the fact that commodities are priced in our own devalued dollars.
It’s all thanks to some new market regulations that most investors will never hear about…
Washington Goes on a Regulation Spree
It’s no secret the U.S. is losing face in the global community. It’s partially due to our currency. The U.S. dollar has lost 42% of its value since 1985.As nations lose respect for the U.S., our government has tried to blame their shortcomings on the market and speculators. Also, in recent years, Washington has been reacting to a number of scandals and the financial meltdown in 2008.
Washington’s brilliant response to all this: go on a regulation spree!
Now it’s worth noting that the U.S. government has never once been proactive in setting market regulation. It’s always been a knee-jerk response to some market event.
For example, the Glass Steagall Act of 1933 separated commercial and investment banking thanks to the Great Depression (then repealed it in 1999).
The Sarbanes Oxley Act, passed in 2002, set new standards, rules and regulations for publicly traded companies. Congress passed this Act because the world had just endured corporate scandals like Enron, Tyco and WorldCom.
The meltdown of the housing market, the subprime crisis and a massive governmental bailout of the financial community in 2008 resulted in the mother of all regulatory legislation.
It’s called the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Even the name is long, but not as long as the legislation itself.
It’s a 2,300 page document that outlines the rules and regulations of the so-called “free markets.” For the commodity markets, it’s given the CFTC (Commodity Futures Trading Commission) regulatory powers like never before.
It’s these new regulatory powers that will chase commodity traders away from the U.S. and away from the U.S. dollar.
Say Good-bye to Traders, and Commodities Priced in Dollars
The policymakers in Washington seem to forget that the commodity markets are global. Commodities may trade in the U.S., but they are often produced and consumed far outside U.S. borders.For instance, West Africa and Brazil produce cocoa. Russia, South Africa, Canada and Australia all produce gold. Chile produces copper. The Middle East, South America, Asia and Africa all produce oil. The U.S. may produce grains – but so do Australia, Canada and Ukraine.
The entire world consumes these staples. Traders all over the world can get their hands on them outside the U.S. if they have to.
That’s exactly what they will do if our policymakers keep trying to police our free markets.
Mark my words. If our U.S. policymakers want to create onerous regulation like the Dodd-Frank Act, traders will go elsewhere for their commodities.
Any attempt to make the commodity market less than the free market it is, will have dangerous and wide ranging implications.
One of the most devastating is the dollar could lose its privilege of being the pricing mechanism for commodity markets.
The U.S. Winds Up a Big Loser
The U.S. is actually daring the commodity world to move the trading of important commodities away from its shores.Once that happens, it will be a fast transition to pricing and transacting these commodities in different currencies and locations beyond the U.S. and the dollar.
New free market commodity exchanges will open in jurisdictions that are friendlier to business and support free market capitalism.
I expect that the commodity markets will gravitate away from the U.S. markets in years to come. Free markets operate optimally when governments supervise but do not impose rules to stop business activity.
Then when traders start buying and selling commodities abroad, it will be easier to join them.
Happy trade hunting!
Andy Hecht
Editor, Commodity Trend Alert & Trade Hunter
