As 2011 draws to a close, it would be good to look back at the year’s busted myths to see if we were on track. We tackled four thorny issues: the dollar will be replaced; banks don’t lend; gold is the ultimate hedge; and the euro is on its last legs. Well, let’s update the record.
The Dollar Rebounds
The dollar rose briskly in recent months and remains the dominant world currency. When that myth-busting piece appeared, the dollar was riding a long-term slide against the euro and the yen. The core of the article was that the dollar maintains international acceptance and, despite such critics as Boris Yeltsin, it would remain the prime exchange currency. The slippage of the euro because of its debt problems only strengthens the busting of this myth.
Here are a few recent findings. According to an IMF summary report covering the first two quarters of 2011(the latest period for which data are available), the US dollar increased as the preferred foreign exchange currency. Total worldwide allocated reserves of foreign exchange holdings stood at $5.4 trillion in the second quarter; the dollar accounted for $3.3 trillion (61%), while the euro held $1.5 trillion (28%). In the first quarter, $3.2 trillion US dollars were held, standing at 60% of the total. Basically, the level is unchanged, certainly not shrinking rapidly as argued by the naysayers.
Banks Not Lending
This series also tackled the myth that banks don’t lend, still reasonably pervasive. However, this myth is losing steam in part because economic conditions are improving. Here are some recent facts.
According to a November 10, 2011 Federal Reserve Bank Report on U.S. commercial banks, for the third quarter 2011, compared to the previous quarter: loans and leases in bank credit up 4.7%; commercial and industrial loans up 10.4%; consumer loans up 2.2%. These selected statistics merely indicate that banks do lend when both sides — lender and borrower — believe there is a solid likelihood of benefit.
Gold Is NOT the Ultimate Hedge
All year gold has shared the volatility of the 2011 market rattles everyone. The ultimate hedge idea looked invincible early in the recession when investors flocked to this safe haven. In 2009, ETF gold holdings nearly doubled from the prior year. This year sees a shift. In recent months, gold has not moved counter-cyclically to the market. At times both rise and both fall, which is not how a hedge is supposed to work.
A near endorsement of two of our myth busting efforts appears in a Nov. 16 story in CommodityOnline titled, “Gold under pressure, crude declines on US dollar strength.” We couldn’t have said it better ourselves.
In fact, investors are shifting to a better hedge, and this hedge was rising before and during the recession: art. For the first six months of 2011, the art market has enjoyed the best half-year in its entire history. According to artmarketinsight.com, total global auction revenue from fine art sales in the first half of this year totaled $6.3 billion dollars, pushing art above its peaks in 2007/2008. The first half 2011 total also exceeds the total 12-month figure for 2009. Compared to 2010, the art market’s revenue total is up 34%.
The article also notes that Chinese investors are on board. In 2010, China emerged as the leading global marketplace for Fine Art. With sales amounting to $2.2 B in 2011, China again leads the UK and the US (with $1.6 and $1.4 billion respectively). As a result, amazingly, Christie’s and Sotheby’s marketshare is slipping.
The last myth to get the treatment was the lamentable death of the euro. When the article appeared, Greece was on the barbecue and a referendum was planned. The doom and gloom gang fretted endlessly. Then the euro-zone leaders gave the Greek Prime Minister the third degree (as predicted). He is now the former PM, ready to enjoy fishing in the Adriatic perhaps with Silvio Berlusconi, a like-minded foot dragger. Both Greece and Italy appear to be embracing fiscal reform. The markets have generally recovered; the doom and gloom set is in hiding; and the euro lives.
All in all, a pretty good year in the myth busting arena. In preparing this summary, we worried that maybe the myths we tackled were too easy. Maybe not. Total gold investments in the U.S. raced ahead from 2008 to 2010. Paul Krugman was nailing the lid shut on the euro. China and Russia were planning a mysterious new currency to topple the dollar.
Please send suggestions. We’ll see what next year brings. Be assured there are more myths forming out there.
Michael McTague, Ph.D. is Senior Vice President at Able Global Partners, a financial consulting firm in New York City.