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The U.S. dollar is on a slippery slope — down more than 8% from its highs earlier this year and down 54% from its all-time highs.
Make no mistake: The fundamentals have not changed, and the buck probably has lower to go — perhaps much lower. Here’s a quick summary of what’s driving the greenback lower …
1. The huge Federal debt. Nearly $9 trillion and counting. America is basically living on borrowed cash, and the Good-Time Charlies in Washington are keeping the printing presses busy to pay the bills.
2. The China syndrome. Overseas investors own more than half of the $4.4 trillion in marketable U.S. government debt outstanding, up from a third in 2001, according to data compiled by the Treasury Department. Most of China’s $1.34 trillion in currency reserves are U.S. Treasury bonds. The country already announced plans to diversify its reserves out of the dollar, but China might accelerate that program given the latest action in the buck.
3. Bernanke’s boo-boo. I think the Fed made a huge mistake when it cut the benchmark interest rate by 50 basis points. Supposedly made to protect the economy against a recession, the cut is really a bailout for big funds that made bad bets in mortgage and corporate debt. This is causing investors to lose faith in the once-mighty greenback.
Heck, the U.S. dollar is now worth about the same as the Canadian dollar (called the loonie) for the first time in 31 years!
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Of course, the kind of steep decline we’ve seen in the U.S. dollar can go on for only so long before we get some kind of a bounce. Nothing moves in a straight line up or down.
I want you to be ready for any potential bounce because it’s likely to be very temporary. So today I’m going to give you my three favorite investments to buy on any short-term rally in the dollar. These will help protect you once the greenback inevitably resumes its downward spiral …
Your Chance to Buy Hard
Assets on the Cheap!
Investment #1: Precious Metals
Since gold is priced in dollars, as one goes up, the other goes down. In fact, there’s about a 92% inverse correlation between gold and the dollar. I like to call this phenomenon the see-saw of pain.
Simply buying gold or a gold ETF like the streetTRACKS Gold Shares (GLD) or the iShares COMEX Gold Trust (IAU) is a very simple way to convert your shrinking dollars to something with real, growing value. Ditto for buying silver via the iShares Silver Trust (SLV).
Along with the falling dollar, there are other solid fundamental reasons to own both gold and silver. Here are just three of them:
- According to a report from the World Gold Council, overall gold demand rose to $19.8 billion in the second quarter of 2007. That’s a 27% increase over the same quarter last year!
- Demand for gold jewelry jumped 37% in the second quarter to reach a record $14.5 billion.
- On the supply side, mine production reached 1,298 tonnes over the first half of the year vs. 1,171 tonnes in the first half of 2006, an increase of 10.8%. However, when you take into account net dehedging, mine supply reached 918 tonnes against 889 tonnes in the first half of 2006, it was an increase of just 3.3%.
You can also get a stake in precious metals through mining companies. Most of them are leveraged to the price of the metal they mine, which means their share prices tend to rise along with underlying metal prices. You can get a diversified stake in gold miners through an ETF like the Market Vectors Gold Miners ETF (GDX).
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Just remember that if you buy U.S.-based gold miners, their shares are priced in dollars. That somewhat mitigates the dollar-hedging nature of precious metals, which brings me to …
Investment #2: Foreign Stocks
Since the shares of foreign companies are priced in their home currencies, they can provide U.S. investors with gains as the U.S. dollar falls.
For example, look at this chart. It compares the iShares Canada ETF (EWC), the iShares MSCI EAFE Index ETF (EFA), and the S&P 500 SPDRs (SPY).
You can see that the S&P 500 is lagging both the broad-based foreign EFA and the Canada-focused EWC. In fact, Canada is DOUBLING the performance of the U.S. market. Part of that is due to Canada’s rip-roaring market, but it’s also partly due to Canada’s rising currency.
So, put together the strength of precious metals and the power of foreign stocks, and you’ll get my third, and favorite, way to hedge against a falling dollar …
Investment #3 — Foreign
Precious Metals Stocks
Foreign precious metals stocks give you the best of both worlds! They’re already on the launch pad because of rising metals prices, and the fact that their shares are based in foreign currencies gives you additional protection against a sliding greenback.
Want a concrete example?
I recommended a gold stock in Red-Hot Canadian Small-Caps — Jaguar Mining. Jaguar is a Canadian-listed miner that operates in Brazil. As of the end of trading this past Monday, its shares on the Toronto Stock Exchange had racked up a respectable 37% open gain since my initial recommendation. Not bad!
But Jaguar is also listed on the American Stock Exchange here in the U.S. Those shares are up 68% over the same time!
How is that possible? How could the shares of the same company produce such different results? Because Jaguar’s base currency is the Canadian dollar … so its U.S. shares had to rise proportionally to make up for the greenback’s fall against the loonie.
I’m not telling you about Jaguar so you’ll go out and buy it right now. For one thing, unless you subscribe to Red-Hot Canadian Small-Caps, you won’t get my signal on when to exit.
Still, I think the stock is a powerful example of how buying foreign gold miners on U.S. exchanges can give you a double shot of profits as the dollar falls.
Bottom line: I’d use any temporary bounce in the U.S. dollar to buy gold, silver, and precious metals miners, with a keen eye to foreign-based stocks or ETFs.
Yours for trading profits,
Sean
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, Tony Sagami, and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Adam Shafer, Andrea Baumwald, Kristen Adams, Maryellen Murphy, Red Morgan, Jennifer Newman-Amos, and Julie Trudeau.
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