Hedging against Long Term Dollar Decline

Yellow Metal beats Green Back

If you are invested in gold right now, then you are about to see that investment pay off significantly in the coming months and years. If you are not, either get in, or watch others prosper. Gold is real money, not just a commodity. It has intrinsic value, unlike fiat currency. With U.S. growth slowing to a crawl, and other international economies growing at much faster rates, Gold is a safe heaven to preserve wealth.

Gold has a negative correlation to the U.S. dollar. In other words, when Gold is up the dollar is down and so on. Because of slower growth in the United States, the following will contribute to bullion’s appeal and a drop in the dollar:

The Fed cannot raise rates in a slowing economy. This is significant because as other countries with much faster growth raise their benchmark interest rates to tame inflation, the U.S. is either keeping rates unchanged or even lowering them. This scenario hurts the dollar relative to other currencies with higher growth because dollar-denominated asset spreads become narrower then foreign assets.

Critics argue that the U.S. Dollar is the safest currency is the world. That may have been accurate 5 years ago, but things have drastically changed since then. One of the most important differences is the advent of the Euro in 2000. The Euro is challenging the dollar as the global reserve currency. What is meant by this is simply that foreign central banks hold a majority of their currency reserves in the Dollar. Well over the past few years that has changed. Foreign central banks are divesting themselves away from the Dollar and into the Euro and Gold. It is simply called diversification. This process is sending more dollars into the dollar supply, thus diluting its value by increasing the money supply.

Other big problems include the continued depreciation of the current account deficit, trade balance and federal budget. While politicians argue about fiscal and monetary policy changes, the boat is sinking. The previously mentioned imbalances are putting extreme pressure on the dollar, which is why it is down in excess of 30% since 2001 – as measured by the U.S. dollar index. The point I am trying to make here is that the aforementioned will decrease the value of the dollar, which will in turn increase the price of Gold. Bullion is priced in U.S. dollars so if the dollar goes down, then the purchasing power of other currencies goes up, thus decreasing the price of Gold relative to other international currencies.

This is all basic economics 101 with a combination of gold and dollar trade theory. I am not a Financial Adviser nor am I licensed to give an investment recommendation. What I can tell you is that I am intelligent enough to have enough foresight to identify a great opportunity to not only retain your wealth, but to also enjoy appreciation. A dollar today is worth more than a dollar tomorrow. The question is what will you do to make it worth more tomorrow? The rich get richer and dare I say the poor and middle-class get poorer. This is simply the direct result of their purchasing power relative to the rate inflation getting eaten away every year. Will you be left out too?