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Early of February of 1993, the price of one ounce of gold was $ 330, and the Swiss Franc stood at 1.53 to the US-Dollar. Ten years later, the price of one ounce of gold has increased by 15% to $ 380%. During the same lapse of time, the USD fell 11% to 1.35 against the Swiss franc. An investor in the US, whose living costs are paid in US dollars, would not worry too much about the Swiss franc or Euro going up or the dollar down unless he or she were to travel to Europe. A Swiss investor however, who would have to convert his US dollars back to Swiss francs, would only have gained 4% on his gold investment. You do not have to be an expert chart reader to notice that the two lines in the graph below reveal something striking. When one line goes up, the other goes down and vice versa. When the bull market in gold started in 2001, the US dollar began to fall against all major currencies with quite dramatic consequences for the European investor. But even a US dollar "denominated " investor could greatly improve his investment or asset protection performance.  The medium-term picture Medium-term, we can clearly see the correlation between the gold price and the US dollar. In the European press, you may read the argument by those who missed entering the gold bull market that it was not worth having gold as all the gain would have been lost by the falling dollar. This is obviously no sophisticated reasoning as it ignores the fact that you can protect yourself against a falling currency.  The short-term picture Short-term, we notice how the gold price and the US dollar have gone opposite ways since the beginning of 2002, which trends, once in progress, are likely to continue.  Are US-markets fundamentally cheap? Historically, a FAIR valuation of US markets indicates a dividend yield of 4 to 5%. Dividend yields at present, however, are still below 2%. The answer to the above question is therefore simple: it is NO! As pessimism spreads, gold will rise and the dollar will fall.  The following recommendations were valid at the time of writing, viz. at and are not necessarily pertinent when you happen to read them.  If you believe that the down-trend of the US dollar against other major currencies will continue and you wish to learn how you can hedge your dollar investments, register at www.pzim.com, or send an email to investment@pzim.com. Peter Zihlmann February 12, 2003 Email this Article to a Friend 426735773 |
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