THE U.S. DOLLAR: BATTERED BUT NOT OUT
Michael Checkan
Pick up almost any newspaper these days and your will read about the decline of the dollar. What's going on? How can you protect yourself against the loss of purchasing power due to a falling dollar?
For the decades after World War II, the U.S. dollar was an outstanding success story. As a result of the Bretton Woods agreement, it became the reserve currency of the world. At that time, the United States was an undisputed superpower. Its currency was backed by the largest government-owned gold stockpile in the world. It was accurately said that the U.S. dollar was as good as gold.
After the devastation of World War II, the economies - and the currencies - of Europe and Japan were in shambles. The economic might of the United States was unmistakable in the 1950s - as were the imperialist ambitions of the Soviet Union. The U.S. dollar became the most respected and most desired currency in the world.
It was also one of the few currencies that could be easily exchanged for gold. Most developing and developed countries established exchange controls, to try to prop up the value of their currency. These were the best of times for the U.S. dollar.
I entered the world of foreign currencies in the mid-1960s as a bank foreign-exchange trader. After a few years, I left the bank to accept a position with the largest foreign currency and precious-metals dealer in the Western Hemisphere. This was the time of a strong dollar with fixed exchange rates. Things were going to change dramatically in the 1970s.
The Gold Window Closed
During this time, U.S. dollars were piling up in various central banks around the world. At the same time, the United States was engaged in a "guns and butter" policy. We were fighting a shooting war in Vietnam while waging a political war on poverty here at home. History confirms that both wars were lost, as was much U.S. treasure.
In the late 1960s and the beginning of the 1970s, many governments, especially France, were demanding gold for their excess dollars. In August 1971, President Nixon solved this problem by suspending the right to exchange dollars for gold. In the vernacular of the day, he closed the gold window.
No longer could governments demand gold for their excess dollars. This one event was the catalyst for the accelerated decline of the U.S. dollar, which continues to this day. As a result, there was no longer a "governor" on the printing presses. The flood of paper dollars and the resulting inflation of prices had begun.
Throughout the 1970s, the U.S. dollar plunged in value. Interest rates soared, as did the price of gold and silver. In the 1980s, things began to stabilize, due to dramatic actions taken by President Ronald Reagan and the new chairman of the Federal Reserve, Paul Volker.
While the dollar stabilized, the world saw another huge benefit: The collapse of the Soviet Union and the end of the Cold War. The U.S. dollar remained strong at home and respected abroad for most of the 1990s.
The first decade of the new millennium witnessed another sea change for the dollar, as it dropped dramatically against stronger currencies, such as the Swiss franc and even the once-lowly Euro. It also fell in comparison to such "commodity" currencies as the Canadian, Australian, and New Zealand dollars and the Norwegian kroner. It plunged even more when measured by the only "real money" in the world, gold.
The Current Outlook for the Dollar
That's the short story of the dollar's fate over the past 60 years. But what about the future? What's the short-term outlook for 2010? What do we expect to see over the next 3-5 years?
For the next year, the trend for the dollar is down - but with considerable volatility along the way. The medium to long-term outlook is for continuing weakness. We expect that the U.S. dollar will continue to be the reserve currency of the world during this period, but with a significant shift occurring. Central banks no longer want to hold only dollars. More and more (especially the governments of India and China) are adding gold and Euros to their vaults.
My advice to you today is to do what the central banks are doing. Namely, diversify some of your assets outside of the U.S. dollar.
Most of your assets will continue to be in dollars, because this is your reference currency. But we recommend that as much as 20% of your assets be kept in other currencies, such as the Euro and the Swiss franc, plus such commodity currencies as the Canadian, Australian, and New Zealand dollars, as well as the Norwegian kroner.
Additionally, hold some of your assets in commodities that have outperformed most every investment this decade. This means putting 5% of your investable assets in gold, as a core holding. This is your wealth insurance. We recommend putting an additional 10-15% in precious metals, divided 40% in gold, 40% in silver, and 20% in platinum.
The U.S. dollar is battered but not out. It is still the world's premier reserve currency. The prudent investor should continue to hold dollars, but must hold other currencies and precious metals as well. In my opinion, these holdings should not only be outside the dollar but outside the physical borders of the U.S. as well.
In my next alert, I will suggest specific ways to hold foreign currencies and precious metals in Europe and Australia. Look for that message this coming Friday. In the meantime, please take the time to review your current holdings and strategy. And begin thinking about the changes you want to make in the coming year.
LiveStrong,
Michael Checkan
Here at ASI, we specialize in helping clients exchange dollars for precious metals and other currencies. Give us a call at 1-800-831-0007 or 301-881-8600 and let us know how we can assist you.
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