Pentonomics – JPM Has Seen the Light

February 7, 2011 at 11:27 PM

Even JPMorgan is losing faith in the U.S. dollar as the world’s reserve currency. The bank is already a custodian for some precious metal ETFs; but now has also decided to accept physical gold as collateral with its counterparties.

JPM said it would take gold as collateral to satisfy securities lending and repurchase obligations probably because investors the world over have reached an epiphany. The watershed moment has come for the U.S. dollar. The Fed’s 26 months of zero percent interest rates and endless build up in credit has now greatly expedited the dollar’s demise.

But it isn’t just JPM that has seen the light. Emerging markets that have hitched their currencies to the ill-fated dollar are experiencing crushing food inflation and economically-destabilizing price increases. The desperate attempt to keep their currencies from rising against the Fed’s dollar destructive practices has backfired. The choice is clear; either allow their currencies to rise and experience a slight decline in exports to the U.S. or maintain a currency peg to the dollar and witness an inflation led collapse of their economies.

My prediction is that more banks will use gold as their preferred currency and that some countries will chose to trade commodities such as oil in currencies other than the U.S. dollar. Commodity prices are surging and copper is at an all-time high. In fact, in the last 6 months oil is up 25%, cotton is up 125% and sugar is up 80% in dollar terms. Imagine if you are living in a second or third world country and over half you income is used for food and energy—sorry Bernanke, don’t ever think of asking an Egyptian what their core rate of inflation is!

Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.