Cleared for takeoff?

By Kevin Kerr, MarketWatch

NEW YORK (MarketWatch) -- The U.S. dollar has been more like a piñata than a reserve currency lately, and that has helped push gold prices back up.

The problem with a falling dollar is that not many of us know what else to fill our wallet with should the dollar truly lose significant value.

One "flight to quality" vehicle often touted as a safe haven is gold. The perception that precious metals are a sanctuary in economic storms may often pique investor interest. Has gold's time arrived?

The relentless printing of money by the Federal Reserve and bailout after bailout has recently driven confidence in the greenback to a new low for the year. The recent action has made many investors nervous. These loose-money policies and low interest rates are, in my opinion, the main reason for the falling dollar.

For a very long time credit was simply too cheap; and when money is cheap, people tend to over-indulge. And boy, did we.

We saw this in no sector more than in the housing market which surged unchecked until the ultimate collapse. The liquidation was devastating and those effects may be felt for decades to come; moreover, the dollar is almost certain to suffer.

Currencies make strange bedfellows

The U.S. dollar has been the world's currency of choice and the reserve currency for a long time. All that may be changing -- or is it? Recently, China has made overtures that it is ready to start using a different reserve currency; but many have dismissed this as simply rhetoric and posturing by China.

Beijing's comments about replacing the world's reserve currency with a basket of International Monetary Fund currencies -- including the yen, euro, and British pound -- have been increasing as of late and that's making some dollar bulls nervous.

How realistic is such a scenario? In September 2007, Federal Reserve Chairman Alan Greenspan said the euro could replace the U.S. dollar as the world's primary reserve currency.

However, another major impediment to such a switch is China's huge dollar-denominated foreign reserves and the fact that the U.S. and China appear joined at the hip. We buy their goods and they buy our debt; it's like a failing marriage where the couple simply can't get divorced because they need each other for selfish reasons.

As the dollar continues to weaken, nobody can fault China for being worried about the value of the dollar and at least discussing alternatives -- even divorce.

Switching deck chairs on Titanic

While the dollar has been losing ground and attractiveness to some investors, many of the other fiat currencies haven't fared much better. Clearly, China is sending the message (as are OPEC and others for that matter) that they basically want a non-political, stable, and liquid international currency.

Few fiat currencies that I know of -- if any -- fit that model, but many believe gold does.

When President Nixon took the U.S. off the gold standard on August 15, 1971, the United States no longer exchanged dollars for gold. After about two years, currency exchange rates were allowed to float against each other. These floating currency rates are set by market forces -- not the IMF -- and these rates may change constantly on the free market.