Decline of the Dollar

- Dugald Malcolm

Montreal, Canada

Earlier this month while writing about gold, I posted a chart of the U.S. Dollar Index to demonstrate the abysmal state of the U.S. Dollar. The index is valued relative to a basket of currencies, including Euros (57.6%), Japanese Yen (13.6%), British Pound Sterling (11.9%), Canadian Dollars (9.1%), Swedish Kronor (4.2%), and the Swiss Francs (3.6%).

The chart I posted, similar to the one above, shows the downward trend line that has plagued the dollar since early March. I also made reference to the Death Cross of the moving averages that occurred in June. This does not bode well for the dollar, which continues to push its way lower. What's more, it still has room to move lower; I have included possible levels of support on the chart above at 74 and again just below 72, a low made back in spring of last year.

While this short term downward trend is dismaying, it becomes downright scary when we realize that this is not a new story. If we go back over six years ago, to the beginning of 2002, we see that the dollar index began its medium term downward trend as defined by the chart below.

It becomes absolutely nauseating, however, when we go back even further. The next chart goes back a quarter of a century, all the way to 1984, where we see an even longer term downward trend of lower highs that has been in place since then:

This staggering decline of the dollar has brought about a new reality for nations and their foreign reserves. According to data from Barclays Capital, countries around the world have put 63% of their new cash reserves into Euros and Yen during the second quarter of 2009. This represents the highest level it has ever been in any given quarter. The 37% of cash reserves that the dollar now comprises is the exact opposite of what it was 10 years ago, when it, not the Euro and Yen, represented 63% of total reserves.

While I have used the dollar's depreciation in my case for having gold in one's portfolio, the same case can be made for foreign currencies as well. Astute individual investors should follow the example of the central banks and make currency diversification a part of their portfolio - including, of course, gold. In fact, we have doubled our gold exposure for our managed accounts since last week on possible further dollar weakness.

Have a good weekend!

Comments

[Gold]

Yes i too had the same doubt in my mind that what happens if the gold bubble bursts? without high inflation.
Thanks for the great reading, we buy Gold in a recession. I will pass this on to our Ira clients to read.

[Andriy Moraru]

The question is what will happen if the gold bubble bursts? Without high inflation, the current growth looks so speculative, that there is little doubt for me that the gold will eventually fall from the current highs to about half of what it's currently worth...