TIME TO DIVEST YOUR DOLLARS - SMARTLY!
Benjamin Franklin, one of the founders of the United States of America and a man famed for saying "a penny saved is a penny earned," would be stunned by America's affection for debt nearly 250 years later. Quite surely, he would also be flabbergasted by the world's willingness to invest in and even support that foolhardy love affair!
U.S. debt - both private and public - is at record heights. In a nation that once saved all it could and resisted taking on debt, Americans no longer borrow money just to buy homes. Now they pay for their vacations, household bills, groceries, cars, and even their income taxes with their credit cards. Is this important in a global context? Is this important in the context of your personal investments and wealth management? You bet it is!
LOOKING OVER THE ABYSS
The US dollar is in a long-term downtrend and a bear market that started in 2001. Since then, it has lost roughly 50% of its purchasing power versus other world currencies. The following graph depicts the US dollar index since 1984.
In December, the US Dollar index approached the 80 level for the first time in the current dollar bear market. It is currently slightly above 81. The 80 level on the US Dollar index, these days, may well be the most important support point in the financial world. As depicted in the chart, since 1972, when President Nixon divorced the US Dollar from the Gold standard, the US Dollar Index only once fell below that threshold briefly.
A drop of the US Dollar Index below the 80 level could signal the end of the US Dollar's status as the world's single and undisputed reserve currency. The longer it stays below the 80 level, the clearer the world will recognize that fact -- and act on it.
Fortunately, that did not happen. The central banks of the main Dollar creditors - primarily China and Japan - backed off, the Dollar "rallied" (and precious metals and oil fell). The situation is deemed to have "stabilized". Indeed, things look very similar to April 1955, when the US Dollar index reached the 80 level last time. Then, as now, the major financial nations met (called the "G-7 nations" in March 1995, called G-20 nations in November of 2004). Then, as now, the Japanese were threatening to sell their holdings of US Treasury debt instruments.
Then, as now, the major financial nations met (called the "G-7 nations" in March 1995, called G-20 nations in November of 2004). Then, as now, the Japanese were threatening to sell their holdings of US Treasury debt instruments. Then, as now, the rest of the world was demanding that the US stop borrowing so much.
Then, in 1995, the rest of the world, specifically Asia, "blinked". They stepped in, aided by the Europeans, to support the Dollar. The US Dollar index began a long bull market, which lasted nearly seven years, finally topping out only at the end of January 2002. The Bush Administration is "sure" that the rest of the world will blink again. Wall Street is not quite so sure, but has decided that any other outcome would be "unthinkable." They blinked then -- they'll blink now…
The problem with that sanguine attitude is that the situation has changed from what it was "then". Ever since March 1985, the US has been a debtor nation. It is today the NUMBER ONE debtor nation in the world. Its currency has since suffered three bear markets, which all turned around above the 80 level. However, the difference in today's US dollar "strength" is best illustrated in hard numeric DEBT facts: At the bottom of the previous two dollar bear markets, US debt represented a value of 1% of US GDP in 1987 and 5% of US GDP in 1995. In 2004, at the end of the third quarter, US debt measured USD 4.4 TRILLION or 42% of GDP!
THE TRILLION DOLLAR QUESTION: WILL / CAN "THEY" SAVE THE DOLLAR?
Over the past three years, it has been mainly Japan and China, through their Central Banks, that have bought close to a TRILLION US Dollars, in the process holding the US Dollar up and also funding a very large portion of the never-ending US budget deficits. As of September 30th of last year, China and Japan jointly owned USD 895 Billion of US Treasuries (without taking US agencies into account).
The "trillion dollar question" investors and central bankers around the world ask themselves today: Will they continue doing that? Or, maybe the question should be "CAN they continue doing that?"
The short answer to this question is that they can't do it. Starting in the first quarter of 2005, it will be up to the US to support its own Dollar. Japan is openly reporting that its economy has been at a standstill since April of last year. Sorry, they can't help. Japan has stopped supporting the US Dollar with Yen sales in March. Having slid back into recession, Japan now has a valid excuse to stand back.
Meanwhile, the Chinese banking system is virtually insolvent. At the end of 2003, outstanding commercial bank loans were 145% of GDP, the highest ratio in the world. Bad debts on the books of these banks stood at 40% or higher, also the highest in the world. These "hollow" banks stand behind China's vast surge forward, fuelling China's industrialization through their massive loans. China is in no rush to see its own Yuan currency any higher than it is against the US Dollar because a higher currency could kill banks so exposed to a sustained outflow of depositors wanting to move their money elsewhere.
"Given the size of the US current account deficit, a diminished appetite for adding to US Dollar balances must occur at some point."
Who said this? Was it the chairman of the ECB? Was it the Chinese Finance Minister?… No, this comes directly from the man "in charge" of the US dollar, Federal Chairman Alan Greenspan! Mr. Greenspan said this during his recent presence at the G-20 meeting in Berlin.
And he added the following: "International investors will eventually adjust their accumulation of Dollar assets or, alternatively, seek higher Dollar returns to offset concentration risk, elevating the cost of financing the US current account deficit and rendering it increasingly less tenable."
In sum, Mr Greenspan joined the chorus of international concerns that the US current account deficits are unviable. For once, we agree!
THE SWISS PRECIOUS METALS ANNUITY CERTIFICATE
Over the next few months, we expect a continuation of the current technical rally in the dollar. This may well offer one of the LAST opportunities to GET OUT.
The downward-trend of the Greenback is one that started more than three decades ago. Today, compared with January of 1971, the dollar is worth only one fourth of its value versus the Swiss franc. In January of 1971, it took 4.304 Swiss francs to buy one US dollar. Today, it takes only 1.15 Swiss francs! It is only a matter of time before the Swiss franc will stand at parity to the dollar.
As investors, we must consider today how we might protect ourselves from the dollar's decay and the overall ramifications of such decay - ramifications that will likely spread beyond financial markets only. Then, one might also reflect on the current situation differently. Ask yourself how you might benefit from this situation!
In order to benefit from the current situation, investors must diversify out of the US Dollar and into an actively managed mix of precious metals and foreign currency.
There are various ways of doing this. In today's situation, where risks are considerable that the next down-leg of the dollar could be a massive one, so massive that you need to protect yourself not only from market risks, but from social and legal ramifications as well, I recommend a strategy that offers the following benefits:
- Eliminate or at least minimize taxation for assets under management
- Pass on wealth in a flexible, efficient and tax-favored manner
- Build your personal wealth plan in total privacy and confidentiality
- Obtain solid asset protection based on fundamental Swiss or Liechtenstein law
- Benefit from truly global investment access and flexibility
- Take advantage of professional and individually tailored asset management services
- Enjoy supreme safety and service quality based on the employment of only the very best custodian banks and insurance carriers
- Do it all in a private BUT compliant manner
The Swiss Precious Metals Annuity Certificate offers precisely these benefits. This flexible and low-cost annuity policy allows you to invest in a personally tailored mix of precious metals - both physical and in the form of diversified mining shares. You may choose your preferred mix of (i.e. percentages defined by you) of
- a Swiss physical gold storage plan,
- an Australian government-guaranteed precious metals certificate (gold, silver, platinum),
- a selection of internationally acclaimed funds in the area of mining shares, natural resources and commodities, such as the Timeless Precious Metals Fund managed by P. Zihlmann Investment Management AG, and
- liquid foreign currency investments, such as short-term UK gilts or Swiss money market claims.
To learn more about this and similarly interesting strategies and investments, contact us at investment@pzim.com
If you wish to attend the Inner Circle Wealth Strategies Forum in Nassau, from January 22nd to January 24th, please note that an excellent group of speakers and professionals, including Sir John Templeton, will share their wisdom and latest insights on the dollar, precious metals, the stock markets and how you can prosper in times of trouble ahead. For more information, go to the website of BFI Consulting at www.bficonsulting.com/inner_circle_forum/inner_circle_program.html
Peter Zihlmann
www.pzim.com
investment@pzim.com
forex@pzim.com
January 10, 2005
Disclosure: The author has not been paid to write this article, nor has he
received any other inducement to do so. The author is a shareholder in the
company and will benefit from any increase in the company's share price.
Disclaimer: The author's objective in writing this article is to invoke an
interest on the part of potential investors in this stock to the point where
they are encouraged to conduct their own further diligent research. Neither
the information, nor the opinions expressed should be construed as a
solicitation to buy or sell this stock. Investors are recommended to obtain
the advice of a qualified investment advisor before entering into any transactions
in the stock.
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