- Peter Schiff C.E.O. and Chief Global Strategist
-- Posted Friday, 24 November 2006 | Digg This Article
While Americans were busy digesting their Thanksgiving feasts, the rest of the world was barfing up dollars. As a result of our massive trade deficits, foreigners certainly have their bellies full of them. This week’s action in the Forex markets indicates that they may have finally eaten their fill. Unfortunately, the bad taste will likely linger as the dollar’s rout has only just begun.
As American consumers hit the stores this black Friday, few will have noticed that the most significant mark-down occurred in the value of their currency. If anything can be said to have been blackened this Friday it’s the U.S. dollar. While the media remains focused on the dollars Americans are irresponsibly spending, the real story lies in the loss in value of those dollars that foreigners are foolishly saving. The losses are particularly more pronounced among foreign central banks, most notably China, whose foreign exchange reserves, the vast majority being U.S dollars, recently eclipsed 1 trillion. When foreigners finally decide that they have had enough, their reluctance to accumulate additional dollars will mean that America’s perpetual shopping spree will finally come to a screeching halt.
This week the U.S. dollar was carved up like a Thanksgiving turkey. Against the Swiss franc, euro, British pound, and Japanese yen, the dollar lost 3%, 2.2%, 2% and 1.8% of its value respectively. To put those declines into perspective, in terms of the euro the Dow Jones’s 60 point plus decline this week translates into the equivalent of a 320 point decline when measured in euros. In fact, year to date the Dow is only up by about 3.5% when priced in euro’s, compared to its 14.5 % advance when measured in depreciating U.S. dollars. From its high in 2000, the euro price of the Dow is down by over 27%. In terms of gold, the world’s only legitimate money, the picture is even worse. Priced in gold the Dow is off better than 50% from its 2000 peak, and actually down over 7% thus far this year. So much for Wall Street’s phony rally!
At the risk of over using the term, one conundrum is the relative strength in the bond market given the dollar’s recent weakness. From our creditors’ perspectives, the only thing worse than holding dollars is holding future claims to dollars, which is what bonds in fact represent. When foreigners begin factoring ten percent plus annual dollar declines into U.S. bond yields, bond prices will head south fast.
It also never ceases to amaze me how U.S. investors can be so fixated on stock prices yet remain oblivious to what those prices actually denote. Stock prices of course represent quantities of dollars. Therefore, true stock market values actually depend on the purchasing power of the dollar. Concentrating on the former while ignoring the latter is one of the biggest mistakes most investors make.
Unfortunately the technical outlook for the dollar, and by extension that of the entire U.S. economy and the financial markets it supports, is rapidly deteriorating. The dollar Index, now trading near 83.5, has broken though some key support levels and the next test will likely be its all time record lows of just under 80. If that test fails, as it most likely will, look out below. Once the dollar moves into uncharted territory, the selling could intensify, with the dollar index trading below 70 in short order. My ultimate target for that index is 40, which would literally cut the dollar’s value in half. I think the entire move could occur in just two years. Again, putting that decline into perspective, it is the equivalent of over a 6,600 point decline in the Dow. Of course this assumes the Fed finally gets religion and Congress and the President heed its sermon. If not, and hyperinflation ensues, the dollar index could fall far lower, perhaps even breaking into the single digits before bottoming out.
Don’t make the mistake of thinking that this is somehow a problem for foreigners. It is Americans who will feel the losses the greatest, as it will result in substantial increases in both consumer prices and interest rates, and in declining assets prices, particularly for residential real estate. In the other words, what we own will be worth a lot less and what we need to buy will cost a lot more.
Don’t wait for reality to set in. Protect your wealth and preserve your purchasing power before it’s too late. Discover the best way to buy gold at www.goldyoucanfold.com, download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp
-- Posted Friday, 24 November 2006 | Digg This Article
Euro Pacific Capital, Inc.
10 Corbin Drive, Suite B
Darien, Ct. 06840
Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nation's leading newspapers, including The Wall Street Journal, Barron's, Investor's Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg. In addition, his views are frequently quoted locally in the Orange County Register.
Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkley in 1987. A financial professional for seventeen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services.
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