Editor's note: The following is a guest commentary from one of WND's sponsors, Kevin DeMeritt, president of Lear Financial. If you would like to learn more about investing in precious metals, take advantage of the free information Lear Financial is making available to WND readers.
Last year, the International Monetary Fund issued a strong warning for the dollar. Owing to the "U.S.'s massive trade deficit," the IMF was concerned that the dollar was in serious danger of declining.
The IMF statement proved almost instantly prophetic: On the heels of the warning, the dollar obligingly slipped to its lowest level in nearly a year, skidding against the yen and losing nearly 10 cents against the euro in a matter of weeks.
Now, after the first quarter of 2002, the dollar has again skidded 10 percent against world currencies, with the pound, the euro and the Swiss franc the remaining barriers against a total dollar freefall. Some experts believe that, should the dollar index breach the 114.73 support level, there's little to stop it.
What does a sinking dollar mean? For one thing, it means that foreign investors are beginning to realize that the well-publicized U.S. recovery is turning out to be as much of a phantom as the recent recession supposedly was. And, if there's no real recovery, as the dollar now seems to be telling us, foreigners will soon be switching from dollar-denominated assets to other, more robust currencies.
And into gold, too. Apart from its other economic consequences, a declining dollar holds particular significance for gold. Historically, there is an inverse relationship between the U.S. dollar and precious metal prices. In today's case, for example, since the dollar has been weakening and seeking its own level, gold has turned bullish – which makes perfect sense.
Gold – the "storehouse of value" and "the asset of last resort" – is noted for picking up where the dollar leaves off. Apart from all the uncertainty and loss of confidence it creates, a declining dollar simply means that it will take more bucks to buy the same ounce of gold – which effectively starts the meter ticking on future gold purchases. The longer investors wait, the more expensive gold will get, in terms of the dollar at least.
The reality is, if left unhindered, gold will always provide a true and accurate picture of the health of a currency, which, again, is unfortunately why the dollar is now sinking and gold is now rising.
To many economic observers, the "declining dollar/rising gold scenario" is a long, overdue market response. The theory is that the dollar has been artificially propped up for years, and for the usual political motives: fostering the perception that the dollar – and the U.S. – were actually stronger than they were (notwithstanding our retaining the title of "World's Greatest Debtor Nation").
But a dollar on steroids simply isn't healthy for the economy. For one thing, it allows overseas producers to compete on an unfair basis. For one example, orange producers halfway around the globe could actually sell to California consumers cheaper than even local California producers.
Still, the other extreme, a freefalling dollar, isn't exactly good news either. It makes imports more costly, causes inflation, and the Fed raises rates sooner than intended. But the real problem here is, should this freefall accelerate, it will be like a semi going over a very tall cliff: The dollar has a long way to fall, indeed.
Throughout the '90s, the world's nations enthusiastically bought into Clinton's artificially strong dollar, and cranked up their dollar reserves from 50 percent to 68 percent in 10 years' time. But that was then. Now, in recognition of the weakening dollar, the capital inflow to the U.S. is drying up. From about $40 billion per month a year ago, we've averaged only $12 billion in capital inflow for the first two months of 2002. Add in the very real possibility of a double-dip recession, and it's not hard to see why investors are starting to evacuate the dollar like moviegoers from a burning theater.
That's a dark prospect that's been wreaking havoc – and will wreak even more havoc as the scenario plays out – with traditional investments. Economic expert Bob Chapman reported that foreign purchases of U.S. equities fell from $8.6 billion in January to $2.1 billion in February (last year's average monthly purchase was $11.6 billion), which is probably one reason why famous investor Warren Buffet, head of Berkshire Hathaway, recently wrote to shareholders: "Our restrained enthusiasm for securities is matched by decidedly lukewarm feelings about the prospects for stocks in general over the next decade or so."
Meanwhile, gold has simply thrived on the diminished dollar. In a recent article, John Hathaway, a manager of the Tocqueville Fund, said, "Gold will surpass $1,000 an ounce in coming years, largely because of distress in the world's stock, bond and currency markets and an accelerating Japanese banking crisis." All of which is reason enough to take prudent measures today and maintain a 20 to 30 percent position in gold. After all, if history shows us anything, it's that it's not terribly smart to bet against gold in this kind of economy.
Special for WND readers, Lear Financial is making available free information on investing in precious metals.
With more than 20 years of industry experience, Kevin DeMeritt is president of Lear Financial, one of today's fastest growing and most successful precious metals investment firms.