Wednesday, November 7, 2007

The Demise of the Dollar

The last few posts have discussed the ongoing bull market in gold. That bull market picked up steam in a big way in the overnight markets in Asia, with gold rising from $824 to $845 dollars per ounce. My FOREX positions in gold and silver more than doubled again today. The cause of this tremendous rise in the precious metals was simple - the dollar fell off a cliff all last night, losing ground steadily with hardly a pause against all of the 16 major currencies, including the yen. This of course led buyers to rush to the precious metals, the traditional store of value during inflationary times.

The cause of the dollar's slide was simple: Taking their cue from supermodel Gisele Bundchen, China announced they would diversify out of their dollar holdings into "stronger currencies." Since China currently holds several trillion dollars of the US national debt, this is not good news for our country. Lenin once remarked that, "The last remaining capitalist will sell you the rope you need to hang him." This is precisely what our government has done with its profligate spending and reckless rush into unprecedented indebtedness - an indebtedness that is primarily owed to Japan and China. Sun Tzu said several thousand years ago that, "The best general wins without having to fire a shot." By selling China the rope they needed to hang us, there is no need for a geopolitical or military confrontation with us; they merely need to sell their enormous stash of dollars into the open market. They have now announced that they have begun that process, leading directly to today's drastic increase in the speed of our dollar's inevitable descent into worthlessness. Hence the huge rally that is continuing even now in the precious metals.

In yesterday's post we talked about how to buy physical gold. Today we will discuss the next most conservative way to invest in the gold bull market - Exchange Traded Funds (ETF's). An ETF is very similar to a mutual fund, except that it trades on a major stock exchange so that you can buy and sell shares of it through your broker, just like shares of common stock. To invest directly in gold itself, just buy shares of the ETF with the stock symbol GLD. The fund's managers place more gold in a vault in London every time people buy more shares of GLD, and the fund's value moves almost in lockstep with the movements of the spot price for gold. Since the gold is held in London, it should be safe from confiscation by President Clinton a few years from now, but there are a few conspiracy theorists on the Internet who have meticulously examined the fund's prospectus and who have their doubts. In general, though, this is a safe and easy way to share 1 for 1 in the rise in the gold price without having to deal with the inconveniences of holding and storing physical gold.

In past gold bull markets in history, there is a discernable pattern. First gold rises, then the shares of leading gold mining companies go up even more than gold, and finally, tiny junior explorer gold companies soar in value the most of all. We are at the point in this bull market when the leading gold companies are just starting to make their move to catch up with the increasing price of gold itself. To avoid single company risk, the best ETF to play the rise in the stock prices of gold companies has the stock symbol GDX. The companies in this ETF are unhedged, which means they benefit the most from a rise in the price of gold. Some gold companies are hedged, which means they have entered contracts in which they agreed to sell some of their future gold production at lower prices than gold is currently trading. Of course, you want to avoid investing in these companies. Therefore, GDX provides a way to make one stock trade that gives you shares in a large group of unhedged companies, including both leading companies and junior explorers. GDX will soar in value during the next phase of gold's bull run.

In tomorrow's post, we will discuss the riskier process of how to buy stock options on gold ETF's to get more leverage. If you are not comfortable trading options and desire to use the ETF method discussed here today, a good way to do so would be to purchase equal dollar amounts of both GLD and GDX.

2 comments:

SilentBob said...

This is very interesting stuff. The falling dollar has been a big fear of mine for quite a while now. It seems like the Euro gets stronger and stronger each year. Remember when Europe was cheap? Sigh.

Reptile said...

I remember that time very well! When Congressman Ron Paul, the only presidential candidate of either party who actually understands this stuff, pressed Ben Bernanke on this point during his congressional testimony last week, Bernanke replied that an American living in America earning American dollars at an American job and spending American dollars in American stores would not be affected by the devaluation of the dollar. What a crock! The last time I checked, a lot of the products sold at Walmart were made in China, which means the poorest among us are about to see a big jump in their cost of living as the yuan continues to rise in value, which of course means a reduction in their standard of living.