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May 8, 2002
By Kevin
DeMeritt
© 2002 WorldNetDaily.com
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.
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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