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.
Discussions of the consequences of a weaker dollar are no longer theoretical. Foreign investors are actually starting to sell U.S. dollar-denominated assets.
The reason for this paradigm shift, this watershed moment in history, centers on a nasty, four-letter word: debt.
When America’s 2003 fiscal year ended Sept. 30, it was reported that the deficit had reached $374.2 billion. That’s more than twice the published 2002 figure, and it shattered the previous deficit record of $290 billion set in 1992.
But that’s nothing compared to what lies ahead. The White House is already projecting a $480 billion deficit for fiscal year 2004. And that doesn’t include all of the “off-the-books” spending going on.
Warned Warren Buffett: “The deficit has greatly worsened, to the point that our country’s ‘net worth,’ so to speak, is now being transferred abroad at an alarming rate.”
But what’s even worse than record-breaking debt is our cavalier attitude towards it – both on the federal and individual level – that virtually assures the continuation of monstrous deficits for the foreseeable future.
Given the planet’s dependency on the greenback (up to this point at least), given the fact that no economy has come close to rivaling that of the U.S., Washington has seemingly operated under the smug belief that it could let debt run rampant without significantly risking the dollar’s supremacy.
But that’s one smug belief that may prove monumentally foolish. After over 20 long years of mounting deficits (the trade deficit has more than tripled since 1990), our debt is getting to be pretty old business in the world community. In addition to foreign angst over North America retaining the title of “The World’s Debtor Nation,” there have been other shocks to the global economic system. These include:
- The collapse of the dotcom market in March 2000.
- The terrorist attacks of Sept. 11, 2001.
- The serious scandals on Wall Street.
- The impact of the war with Iraq.
- The sluggish U.S. recovery.
None of this has occurred in a vacuum. There continues to be worldwide consequences, under-reported as they have been, to these traumatic U.S. circumstances.
Euro on rise
For one consequence, the euro is looking more and more attractive to foreign investors. From an all-time low of $0.83 in October 2000, shortly after the currency’s introduction, the euro recently hit a record $1.1977 (topping the previous May 12, 2003, record of $ 1.1558).
This is significant because a rising euro directly threatens the dollar’s enduring role as the world’s defacto reserve currency (specifically, nearly 70 percent of official exchange reserves are held in dollars).
Possessing the world’s reserve currency, it should go without saying, has been a critical advantage to the U.S.
“The U.S. can run large trade deficits because the cost of producing an American dollar is far less than what can be bought with it, giving the U.S. an advantage over other countries that must pay for American dollars with their own goods and services. Normally, a country that ran significant trade deficits would face downward pressure on its currency. The dollar’s status as the world’s reserve currency protects the U.S. from this,” reported Mapleleafweb.com.
But that sweet advantage is now being threatened. That’s because the spigots of world investment in the U.S. are beginning to shut off.
According to respected analyst Stephen Roach: “In data just released, overseas portfolio inflows into dollar-based assets totaled only $4.2 billion in September 2003 – far short of the $64 billion average inflows in the first eight months of the year and the $46 billion monthly bogey required to finance the U.S. current account deficit at its prevailing rate.”
Regarding this dramatic decline, ABN Amro Analysts warned, “Given the U.S.’s $45 billion a month current account deficit, this lack of flows (i.e., declining purchases of government securities) in a month when U.S. bonds and stocks both rallied raises questions about the financing of the trade deficit next year.”
Which comes as particularly ominous news since it has largely been the foreign buying of Treasury and Wall Street securities that has kept our U.S. economy afloat. But, as bad as declining foreign investment is, it’s not the only scary news.
Oil in euros
According to Mapleleafweb.com, “In April 2002, a senior OPEC representative gave a speech openly considering changing the denomination for oil payment.” In other words, the petroleum exporting countries are looking at euros over dollars.
Evidently, this isn’t just talk. Mapleleafweb.com also reported that, since 2002, Iran has been shifting the reserves in its Central Bank from U.S. dollars to euros. According to respected analyst, Richard Russell, Russia has also stated that it is thinking of selling its oil in euros instead of dollars. Saudi Arabia would soon follow suit, he believes. Then Russell added:
“There are elements in Europe that would like to give the U.S. its ‘comeuppance’ (‘knocking America off its throne,’ in other words). This is impossible from a military standpoint, but not from an economic standpoint. Remember, the reason our nation remains relatively prosperous is that the U.S. owns and creates the world’s ‘reserve currency.’ This allows America to get away with ‘economic murder’ by paying off its debt with paper that it prints at will and at no cost.“
The universal hedge to the dollar
According to Stephen Roach: “I fear there is a tear in the fabric of confidence that underpins the special role of the dollar – a tear that is now getting larger under the stresses and strains of an unbalanced world.”
So … how do you personally hedge against this tear in the fabric of confidence? How do you preserve your all-important purchasing power in a changing economy?
Consider these opinions.
- Jay Taylor, editor of J. Taylor’s Gold and Technology Stocks newsletter, reported, “People should really be owning gold because it is so negatively correlated to equities and bonds and the dollar, even more than real estate. We make no apologies for our 40 percent allocation to gold and gold stocks.”
- “Gold,” said fund manager Alfred Wong of UOB Asset Management, “is historically found to be negatively correlated with major assets like the U.S. dollar, stocks and bonds. The asset of last resort is gold.”
- Peter Urbani, investment strategist at The Fairheads International Group, one of the world’s most distinguished money management firms, said, “Investors seem to have rediscovered gold as an alternative asset class, which appears to be negatively correlated with the U.S. dollar.”
- “Gold is the only asset class that is negatively correlated with other asset classes, so its price tends to move in the opposite direction to U.S. stocks, Treasury bills, bonds and the U.S. dollar,” reported Asiaweek.com.
Richard Russell has a specific example of this negative-correlation:
“The S&P 500’s 20-month moving average has crossed down through its 40-month moving average, thereby indicating that stocks remain in a primary bear market.
“But look at the picture in the gold market. The picture is a mirror image of the stock market. The 20-month moving average of the gold price is crossing up through the 40-month moving average, which shows that gold is in a primary bull market.
“Gold is now in the accumulation phase, moving to strong hands from weak hands … $556 per ounce is the first target.”
But you don’t have to be a “gold bug” to see the wisdom of diversifying your stock-based portfolio with at least some gold. That’s especially so as the situation with the dollar plays out. Put in perspective, consider how lucky we are to have any asset at all that moves contrary to the direction traditional investments are heading.
Given that key advantage, we should avail ourselves of “the only asset class that is negatively correlated with other asset classes,” as Asiaweek.com reported, and diversify our stocks, funds and bonds at this dramatic junction in history. This is, after all, no time to have all of our hard-earned assets in the same dollar-denominated basket.
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.
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WND Staff