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The Dollar, Pounded and Scrambled
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(April 21, 2007) For the first time in 26 years, it now takes two US dollars to purchase one British pound as the dollar’s weakness continues against most currencies, precious metals, and even a carton of eggs, now up some 30% in dollars terms in a year's time.
The two-dollar pound is just one of those round numbers that makes us sit up and take notice. British travel agents, according to the New York Times this morning, are reporting a 30% increase in bookings of British tourists coming to vacation in the US this summer, inspired by the recent cheapness of our dollar versus the pound.

Today our local daily, the Arizona Republic, ran a column by Russell Wiles entitled, “Here’s How to Profit if Dollar Drops”. In it, Mr. Wiles discussed the prospects for an expected US economic growth of 2.5% versus 5% growth in the rest of the world. He even finds a local money-runner who informs that, “There’s more of a realization that we operate in a global economy.”

And that global economy at this point seems to the leaving the US behind. As Michael Mackenzie writes in his “Global Overview” column in the April 21/22 Financial Times:

“In the past, slowing USA growth has usually unnerved global markets. But in recent years, emerging economies have grown rapidly and ignited a boom in commodities, with China and India also creating a vibrant class of consumers. With growth in the euro-zone, led by Germany, now also outpacing the US, many investors feel the global economy can prosper even if America only muddles through with a period of low growth.”

Yet the Dow reached new highs this week, and the S&P reached a peak not seen in over six years, and all this occurred in the face of a decelerating US economy and slowing corporate profits. The rationale at this juncture is that stocks with international exposure (i.e., earnings in currencies other than the dollar) will thrive in a weaker-dollar environment. Even considering that US current account balances are approaching a deficit of some $800 billion a year, and the dollar is now worth only 50 British pence, it seems that the equities markets - for the time being, at any rate - are willing to tolerate a weaker dollar.

But a precipitous collapse in the dollar may not leave US investors so sanguine about their stock portfolios, and more importantly, may spark a draining of international money out of the US and into countries with seemingly stronger economies.

General expectations seem to be that the pound will trade around two bucks for a while. And in Europe this week there was heard no political outcry against the higher euro/dollar ratio, now at a 2-year high, so no action to counter this trend is likely soon from the ECB.

No doubt we will see some short-term dollar rallies soon, probably some time next week, but the dollar’s secular trend is decidedly downward.

None of these trends are particularly new, of course. And since the launch of this website in 1999, our only message has been: buy gold. Those who have, have seen their wealth grow. Many of those who haven’t are lucky if their investments, on an after-tax and after-inflation basis, have broken even.

It is true that we have Someday gold prices will have risen to a point where we consider gold “too high” to purchase. But when? As has been written, this event will be marked with a sign – a picture of gold bars or coins on the cover of either Time or Newsweek magazine, or maybe even both on the same week.

Until that time, our recommendation is unchanged – buy gold.

In our age of fiat currencies, in which mere ciphers stand in for money, any strategy for wealth accumulation must include physical gold. Without actual gold, any plan of savings, no matter how prudent and secure it feels, is comparable to pouring water into a leaky bucket.

It is a commonplace that the dollar has lost 95% of its purchasing power since 1913. Yet, our perception of inflation tends to be through a lens of ‘shortages.’ We tend to see rising prices for copper, housing, food, land, services, and so forth as the results of supply and demand factors, which will someday come back into balance. In truth, what we are seeing is inflation working in fits and starts through the world’s economy. Houses will not be $25,000 again, hamburger will never again sell for 19c a pound, nor gasoline for 29c a gallon.

Inflation, in short, is a one-way street, consuming dollar-denominated assets steadily, stealthily, and inevitably.

“Saving” in a currency which itself needs saving is, on the face of it, a sure course towards a financial mudslide.

 

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