The U.S. dollar is standing on the edge of the abyss, with one foot on a banana peel. In just the last two months, it’s plunged nearly 4% against a basket of the world’s major currencies!
Years from now, we’ll look back at this as a major turning point when the fires of world inflation and soaring interest rates were ignited, again.
Already, the price of gold is foreshadowing this, skyrocketing from around $560 in early October to as high as $641 this week, with most of the gains occurring in just the last fourteen days.
I’ve been warning you — in no uncertain terms — about a plunging dollar all along. But this is one time when I would have preferred to be wrong. That’s because the next phase of the dollar’s decline is going to send the U.S. economy into a frightening inflationary cycle that will catch almost everyone off guard.
The good news: You can turn this sorry state of affairs to your advantage and make a pile of money. In a moment, I’ll go over five steps that you can take, including information on a mutual fund specifically designed to profit from the dollar’s demise.
But first, because this is so extremely important for your financial health, I want to tell you why the dollar will keep falling and send interest rates and inflation soaring. I’m also going to give you four ways to monitor the coming crisis.
Two Major Forces That Could
Send the Dollar Lower
The dollar had been sliding for two years. So when it bounced sharply earlier this year, the pundits started shouting “rally†almost immediately.
But the greenback quickly lost its oomph. It huffed and puffed along with one more brief spurt of energy, and now it’s throwing in the towel.
Anybody looking at the longer view can see that the dollar’s rally has been nothing more than routine market noise. The major trend since early 2002 has been relentlessly down. And there’s nothing on the economic horizon right now to change that direction.
If anything, I see two big forces that could drive the dollar even lower …
Force #1:
The Huge Trade Deficit
The gargantuan U.S. trade deficit will easily top $700 billion for 2006, the biggest shortfall ever.
The real problem with the deficit is not that we’re buying more than we’re selling. It’s that we have no control over what happens to the U.S. dollars that go overseas for payment of the goods.
The recipients of those dollars are free to do whatever they want with them. If they reinvest them back in the U.S., there’s virtually no problem because the dollars just come back to us.
Unfortunately, when overseas investors look at the U.S. today, they see the biggest IOUs in the history of industrialized society. And in my opinion, they are soon going to start diversifying into other assets and currencies.
In this scenario, the dollars get sold off, draining the U.S. economy of much needed liquidity and increasing the chance of a recession.
Plus, private investors are not the only ones who will turn away from the dollar this time. Despite Wall Street’s rhetoric that overseas central banks would never dump the dollar wholesale, it appears that’s exactly what’s starting to happen …
Force #2:
Central Banks Will Also Dump Dollars
So far, most analysts in the U.S. say foreign central banks are merely talking about dumping the U.S. dollar, that they’d never actually do so.
That’s hogwash! In my opinion, central banks are already dumping dollars. Now, there’s no way to get statistical evidence until after the fact, when it’s too late.
Reason: Central bankers are not going to come right out and say they’re selling dollars. But they will give hints. Witness the recent statements below and you’ll see the increasing pressure on the dollar …
- October 18: Australia’s Treasury Secretary, Peter Costello, calls on East Asia’s central bankers to “telegraph†their intentions to diversify out of American investments and ensure an orderly adjustment. Costello said “the strategy had changed†and that Chinese central bankers were now looking for alternative investments.
- October 30: Sultan bin Nasser al-Suwaidi, the governor of the central bank of the United Arab Emirates, told a meeting of central bankers from Gulf States that the bank eventually wanted to lower its reserves in dollars by anywhere from 8 to 50 percentage points!
- October 31: Japanese life insurers, who manage the equivalent of $1.6 trillion in assets, say they may cut holdings of U.S. Treasuries.
- November 8: At a Frankfurt conference, The People’s Bank of China Governor Zhou Xiaochuan states that China has very clear plans to diversify its currency reserves, which now stand at more than $1 trillion. A wide range of instruments are under consideration, he says, including gold and oil.
Can you blame any of these countries? After all, they’ve watched the value of the U.S. dollar plunge nearly 32% in the past five years. Now, it’s starting to plunge again. And they’re not the only ones who should be worried!
How the Plunging Dollar
Will Affect You …
The very first direct consequence of a falling dollar: Rising interest rates.
This isn’t happening yet because too many people are expecting the U.S. housing market slowdown to send interest rates lower.
My warning: Don’t let anyone tell you interest rates are headed lower.
There’s just too much debt in this country and not enough in savings to avoid a bond market disaster. Indeed, according to technical signals and my analysis of the bond market — there is fully 14 more points of downside in bonds, meaning interest rates could jump as high as 8% or 9% in the months ahead.
Another direct consequence of the falling dollar: Soaring inflation.
You can’t have the dollar plunge like it is now without setting off a wave of inflation. The only way to avoid it would be backing the dollar with gold, which is just not going to happen.
Plus, surging demand for natural resources will only add to the inflationary pressure. Earlier this year, the Commodity Research Bureau’s index of 17 commodity prices hit a twenty-five-year high, and it’s very close to breaking that record right now.
It’s absolutely critical that you watch inflation closely. So, here are …
Four Signals to Help You Monitor
The Coming Wave of Inflation
To hear the government tell it, inflation is tame. They base this on their Consumer Price Index (CPI), the most commonly-quoted measure of inflation.
Don’t be fooled: The CPI is a fairy tale number manipulated by the government. In fact, it’s so flawed in its mathematical construction that it’s practically meaningless.
If you want to know the real truth about what’s happening with inflation, pay attention to real signals that give a far more accurate picture of inflation. Four of them …
1. The value of the dollar: As the dollar weakens further, foreign goods cost you more. Period.
Specifically, watch the U.S. Dollar Index (DXY), which compares the dollar to a basket of major currencies.
The indicator broke its uptrend line the day after Thanksgiving, and now, as you see on the chart, it’s crashing.
You can monitor the dollar index here. It’s also in the “Money & Investing†section of The Wall Street Journal.
2. Treasury bond prices: Keep your eyes on bonds because they are extremely sensitive to inflation.
According to my indicators, when the 30-year Treasury falls below the 110 price level, all heck will break loose as investors start to run for their lives from inflation. This will also signal that the dollar crisis is in full-blown mode.
To monitor the price of U.S. Treasury bonds, again, check The Wall Street Journal’s “Money & Investing†section (pages one and two).
3. The Commodity Research Bureau index: When somebody tries to tell you there’s no inflation, ask why the CRB index has gained almost 16% in barely two months!
Keep an eye on this index. It will take breathers from time to time, but as long as it remains above the 529 level, inflation is building momentum.
You can monitor the CRB index in the “Money & Investing†section of The Wall Street Journal.
4. None other than gold itself! Historically, gold has been an extraordinarily accurate leading indicator of inflation because, for centuries, it’s maintained a basically stable value in terms of purchasing power.
I don’t know if gold will blast off to new highs today, tomorrow, or next month. But I can tell you that the yellow metal is in a long-term bull market and headed much higher.
My view: Once gold closes above the $660 level, record new highs will be right around the corner.
Five Steps You Can Take to
Prepare Your Portfolio
I wish I could say December is going to be a nice, quiet month … that you’ll be able to relax and get ready for the holidays.
But I think we’re on the doorstep of the financial crisis I’ve been warning you about. So it’s absolutely critical that you consider taking these steps to prepare:
Step #1. If you’re still in long-term government and corporate bonds, consider getting out immediately!
As I said earlier, I think they’re headed into crash mode and interest rates are about to skyrocket.
Step #2. Make sure you have your core gold holdings in order. I suggest 5% in gold bullion, with another 15% in the very best gold shares and funds.
Two gold funds I like are DWS Gold and Precious Metal (SCGDX) and Tocqueville Gold (TGLDX).
Step #3. Don’t ignore other key natural resources like oil. There are plenty of great stocks and funds to select from.
For specific investment recommendations, look in the “Natural Resources Riches†and “Real Income†sections of my Real Wealth Report.
Step #4: To directly profit from a falling U.S. dollar, you can buy the Falling U.S. Dollar Profunds (FDPIX) mutual fund.
When the dollar is sinking, this fund rises in value. It’s available through most brokerage firms or through ProFunds directly (www.profunds.com; phone: 888-776-5717). The minimum investment is $15,000.
Step #5. If you’ve got some money set aside for more aggressive investments, be very choosy.
Some of my favorites can be found in the “Resource Speculator†section of Real Wealth Report.
Best wishes,
Larry
P.S. If you’re not already a Real Wealth subscriber, why not join? I think it’ll be the best $99 you’ve ever spent.
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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, and Tony Sagami. 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 inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
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