It appears the ruse is over. After an approximately 20% rally in the U.S $ INDEX [NYBOT:DX] from August 1st to mid November (which quite honestly simply baffled the author), the US dollar has dropped some 7% in the last 5 trading days alone. This is an unprecedented move in the US currency. I swear CNBC contributor Rick Santelli almost fell over while watching the currency market's response to the Fed move yesterday. That move, a decision to target rates between 0-0.25%, was in effect an admission of the Fed's desire to devalue the US dollar in an attempt to re-inflate the US economy back to life and thus fend off deflation. The US $ INDEX chart below shows the results of that decision.
I cannot really fault the Fed's decision. I wrote years ago that the country would pay dearly for the Bush administration's huge fiscal deficits and irresponsible economic policies. Cutting taxes on the uber-wealthy while fighting two wars and spending tax-payer money like a drunken sailor (no offense to the sailor) was and is simply an unsustainable economic strategy. The lack of a sane energy policy, the associated outflow of US dollars to foreign oil producing countries, all combined with an unregulated financial system and we've got ourselves a category 5 economic crisis. So, the Fed simply had no choice. The ultimate result will be continued weakness in the US dollar and a reduction in the standard of living for middle class Americans.
So, what's a US investor to do here? As before, I continue to recommend US investors park a portion of their portfolio in GOLD. You could participate by investing in the GLD ETF, but I prefer holding the coins in my hot little hands. Go for standard American gold eagles or Canadian maple leafs in the 1oz, 1/2oz, and 1/4 oz variety. Take physical delivery and bury them in the backyard.
I earlier recommended Fidelity Select Gold and Vanguard Precious Metals as a play against a weak dollar. Unfortunately, these funds simply got whacked with everything else in the market collapse. No more funds for me...I want the gold in my hands. With all the corruption in the US financial industry these days, I don't even trust ETFs who store the gold in some vault somewhere, leaving the stockholder with a piece of paper. Poppycock. My new mantra is don't trust anyone and its every man for himself. Don't you just love Republican financial market deregulation while the SEC is on permanent holiday?
Here is a 30 day GOLD chart:
Note that December 6th was both the beginning of the US dollar downdraft as well as the beginning of the current leg up in GOLD.
Two addition ways to play a falling US dollar are the Merk Hard Currency Fund (MERKX) as well as the Prudent Global Income Fund (PSFAX) recently taken over by Federated Investments. Neither of these funds has done particularly well so far this year, but both are beginning to perk up as of late as gold strengthens and the US dollar weakens. This is a trend that could be with us for sometime to come. If the US does not adopt a long-term strategic comprehensive energy policy. (Constructive criticism is welcome.)
The trend will continue until the dollar is completely worthless. Do not let the short term drop in oil and gasoline prices fool you. They are only the result of rapid demand destruction, not of plentiful oil. When and if the economy comes back to life, we'll again be faced with our old nemesis: worldwide oil supply will not keep up with worldwide oil demand. In fact, the next encounter with adversary will be even worse than this year as current oil production projects and drilling are being scaled back or canceled due to the deteriorating price of crude. So, don't be fooled again! Be patriotic and fight for a strong economy and currency by sending a link to my energy policy to your elected government officials and demand action.
Disclosure: The author holds all recommended assets mentioned in the article.