Dollar Hits New Lows! Gold, China Surge!
While most U.S. investors stayed home Friday, foreign investors were running away from the dollar.
The greenback plunged to a 19-month low against the euro and a two-year low against the British pound.
The utter speed of its decline rattled Wall Street ... added new momentum to rising commodity prices ... and raised the specter of massive dollar selling by foreign central banks.
This weekend, with no specific news to blame, currency experts scrambled to find an explanation.
But Mike Larson's timely warning that the dollar is on the ropes anticipated the decline. Even before Friday's trading began, he showed you how the U.S. Dollar Index (DXY) -- one of the broadest measures of the dollar -- was busting its two-year trend ... conclusively ending a rally that began in early 2005 ... and paving the way to an all-out dollar rout.
Now that rout has begun in earnest.
The U.S. Dollar Index fell to 85.10 on Tuesday, slid to 84.57 on Wednesday, and plunged to 83.66 on Friday -- an even clearer breakdown in Mike's chart.
Unfortunately, there's no one -- not even the U.S. Treasury Department -- lifting a finger to stop its decline. And, alas, the consequences of their complacency are conclusive:
A New Flight to Gold
Despite the fact that the New York Mercantile Exchange was closed on Friday, gold bullion surged $9.60 to $638.60 an ounce in electronic trading.
In the past 30 days, it's up $51.70. In the past year, it's up $144.90. And since its low in April of 2001, it has surged $382.90.
That's a trend.
And with the dollar just now beginning a new plunge, it's far from over. As Larry points out in his latest report ...
"If China were to lay its $1 trillion in reserves end-to-end using dollar bills, the trail of paper would stretch for 96,906,565 miles. That's enough to wrap around the widest part of the earth 3,876 times! ... China is going to corner the gold market."
And they're not alone. All foreign governments that are flush with sinking dollars have no choice to step up their gold buying.
Oil-producing nations, also stuck with sinking U.S. dollars in payment for their exports, are starting to pile in. Banks, large speculators, small investors -- all are about to rush into gold as a hedge against further dollar declines.
We've been alerting you to precisely this phenomenon all year. Now it's happening.
A New Surge in Energy
A barrel of crude oil -- and virtually every other major source of energy -- is measured in U.S. dollars. So if the value of each dollar declines, the number of dollars per barrel must go up accordingly. For example ...
Approximately one year ago the U.S. Dollar Index was at 92, while crude oil was in the high $50s.
Today, the U.S. Dollar Index is at 83.66, down 9% in value, but crude oil is trading near the same levels as one year ago.
Even assuming no increased oil demand ...
Even assuming no new threats to oil supplies ...
That means the price of crude oil needs to quickly adjust upward by about 9% just to compensate for the dollar's decline. And, as I just explained, that dollar decline has barely begun.
Even Sharper Gains in
Energy and Gold Stocks
For the past two months, while the price of crude oil has been mostly flat or even sliding, energy exchange traded funds (ETFs) have been recovering swiftly.
For example, the Oil Service HOLDRs (OIH), the leading ETF in its sector, has bounced very nicely from an extreme low of 118.19 on October 4 to a close of 140.30 on Friday.
That's still off from its closing peak of nearly 164 last May.
But with the dollar sinking and oil prices likely to adjust higher, it could easily reach, or exceed, those highs by early next year.
Another ETF, this one concentrating in gold mining companies, is also bouncing back sharply:
About two months ago, the Market Vector ETF (GDX) hit an extreme low of 32.41. Friday, it surged to a close of 39.90.
That puts its all-time closing high (41.70) within easy reach. And the pattern is similar for other mining ETFs as well as most precious metals-related mutual funds.
China's Leading Stocks
Gain New Momentum
A powerful fundamental force behind the dollar's decline is the blatant contrast between (a) a weakening U.S. economy and (b) the stronger economies of Europe and Asia, especially China.
So the dollar's slide parallels China's rise. And any further flight from dollar-denominated investments can only boost Asian stocks still further, as Tony has been pointing out all year long.
That's why leading indexes of China's stocks surged so dramatically last week. And it's also a key factor behind the surge in our favorite China ETF.
This China ETF is up by 2.85% in the past week ... 12.6% in the past month ... and over 45% since June -- the equivalent of 350 points on the Dow in one week ... 1,500 in a month ... and nearly 4,900 Dow points in half a year.
But it's not just the magnitude of the rise that we look at: Equally important is its steady pace, with fewer-than-average gyrations and a nice pick-up in momentum.
Naturally, this doesn't preclude corrections. But we're looking to use them as buying opportunities. (See our latest report.).
Why The Dollar
Decline Is Not
Just a Blip
If the dollar disaster were driven strictly by the ebb and flow of international hot money, all this might be little more than a temporary blip on the charts.
But, unfortunately, the dollar disaster is rooted in immense, immutable imbalances that have been building up like a pressure cooker for many years:
→ The biggest trade deficit of all time ...
→ The greatest debt to foreigners of any country in history, and ...
→ The steadily declining competitive powers of America's largest manufacturing industries.
For a while, these issues were buried or ignored. As long as international investors could count on a healthy U.S. economy ...
Or as long as they could earn a hefty premium on their cash held in dollars ...
Then they were usually willing to hold their nose, overlook this ugly picture, and stick with their U.S. dollar investments. But now, those two saving graces are fading fast:
→ Even without a recession, the U.S. economy is already among the weakest of all major nations, and ...
→ Even without any action by the Fed, foreign investors are already anticipating that they're going to get less interest on their cash in the U.S. and more interest on their cash elsewhere.
These are the immediate, most obvious triggers of the dollar's latest fall. But, alas, global economics and international finance are just the tip of the iceberg.
The Decline of the Dollar
Reflects America's Sliding
Influence As a World Power
I have not been counting the years since Dad died. To me, it feels like yesterday; and the last time we talked about the U.S. dollar, like last week.
Dad was devoutly American.
Whenever he predicted the dollar's decline, it was with great pain; whenever he talked about its eventual recovery, it was with great pride.
And today, I share the same feelings when I warn about the traumatic transformations that are eroding America's hegemony as a world economic power.
Despite all our hopes, the dire reality is that Iraq is coming unglued, and events on the ground are moving faster than any "new solutions" that could be served up by Congress.
Just in the past few days ...
→ Iraq's battle lines for an all-out civil war have been more clearly drawn -- many police units fighting with the Shiites; many army units fighting with the Sunnis.
→ Iraq's central government is in paralysis, as Shiites loyal to radical anti-American cleric Moqtada al-Sadr -- the largest single power block in parliament -- threaten to walk out.
→ Iraq's already-fragile social fabric is in shreds. Schools are shuttered. Essential services are shutting down. Most government agencies are nonfunctional. And ...
→ Iraq's last hopes -- diplomatic initiatives to rally regional support -- are either on hold or in danger of being torpedoed.
This, too, is a dollar disaster, and in more ways than one. It undermines America's political, military and economic influence in the Middle East and beyond. It opens the door to the spreading influence of Iran. And it's a mounting threat to world oil markets.
Already, nearly $25 billion in Iraqi oil revenues have been lost due to attacks and sabotage. Now, far more oil is in jeopardy, potentially fueling energy cost inflation, which, in turn, hurts all paper currencies, especially the dollar.
Nigeria is on shaky ground as its oil-rich Niger Delta region again comes under attack from anti-Western rebels, threatening one of America's largest sources of oil imports.
Ecuador, Latin America's second-largest oil exporter, looks like it has just chosen Rafael Correa as its new president -- a man who has threatened to reduce payments on Ecuador's $16.1 billion foreign debt and shift the nation into the leftist camp of Hugo Chávez.
Iran has just announced it will move forward on its own with its Arak nuclear facility to produce plutonium -- one more act of defiance that's likely to destabilize the region. And that's despite a direct rebuff by the UN's atomic watchdog agency, which flatly rejected Iran's request for technical assistance late last week.
President Bush recently summed things up this way:
"You can imagine a world in which these extremists and radicals got control of energy resources. ... They would use energy as economic blackmail ... and be able to pull millions of barrels of oil off the market, driving the price up to $300 or $400 a barrel."
I doubt we will see oil prices go that far in our lifetime. But even oil at $100 per barrel would have far-reaching consequences, helping to drive the dollar still lower and world commodities sharply higher.
Conclusion: This is the worst time to hitch your wagon to the Dow and the ideal time to profit from investments that naturally rise when the dollar falls. That includes ...
Gold, gold shares, mutual funds and ETFs
Energy shares and ETFs
Select foreign securities and ETFs, especially in countries like China, still on track for near-double-digit growth in 2007.
Plus, stick with a good measure of money allocated to Treasury bills or a Treasury-only money fund. Despite the decline in the dollar, it's a must for your ultimate cushion of safety and liquidity.
Good luck and God bless!