Gold: Wealth Protection
Gold futures are trading in the red again today for the eighth straight trading session as oil prices flirt with sub-$100 levels and the US dollar continues to rebound.
Gold for October delivery sank to an eleven-month low of $762 an ounce today during intraday trading. All told, the precious yellow metal has given back approximately 26% since its all-time high of $1,034 an ounce, which was set back in March.
Gold prices have stepped back over the past several weeks/months as investors regained a bit of confidence in the US dollar. This is a reaction to a general sell-off in the commodity market—including crude oil, which is now selling for only a couple dollars over $100, whereas the dollar is currently trading near a 52-week high.
What’s Going on With the U.S. Dollar?
The most recent shot in the arm for the greenback is the US government’s move to bail out mortgage giants Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), which has miraculously dispelled investor concerns over additional damage from the credit crisis that erupted a year ago.
The US Dollar Index, a measure of value of the US dollar relative to a basket of six weighted foreign currencies, has regained nearly 12% since mid-July. Nonetheless, there is little doubt in my mind that these gains will be completely erased over the next few months.
U.S. Dollar, Fundamentally Unsound
The fact is, there are little to no fundamental reasons why the US dollar should be climbing higher right now. Neither the Federal Reserve nor ECB changed interest rates the last time around, and there is nothing on the horizon that would implicate a change anytime soon. Moreover, US economic data has not been particularly stellar this year. If you recall, GDP growth for the first quarter was only 0.6%. The second quarter proceeded with a moderate 3.3% growth in GDP. And although it may be a bit early to make a truly informed prediction, I don’t expect the third quarter GDP numbers to impress. Even if the US economy does somehow manage to post a gain in GDP during the third quarter, inflation should certainly erase any growth below 4%.
The biggest concern for the US economy and dollar is still the reeling housing market.
Those who expect the most recent government bailout of Freddie and Fannie to turn the US housing crisis around are in for a nasty surprise. The bailout will add much-needed liquidity to the secondary market for US mortgages. But it does little to resolve the bigger problems of excessive home inventories, housing prices that continue to drop, and the likelihood of mounting defaults and foreclosures as the economy continues to contract. And when the option ARMs reset and prime mortgages start defaulting, we’ll be in for serious trouble.
The truly scary part about the current American housing crisis is that the stock market crash of 1929 and the Great Depression were preceded by a real estate crash. During that period the Dow Jones lost over 80% of its value. Today the Dow has lost around 20% since the housing market began to go south.
Gold & Other Wealth Protection Tips
Fortunately there are always ways for investors to protect their wealth, regardless of how bad the markets become. The best way to hedge yourself against the coming US dollar collapse is to own physical gold. But let me give you a few more ideas, beyond gold, that should help you hedge against a falling dollar in the short-term.
Buy PowerShares DB US Dollar Bearish Fund (Symbol: UDN)
Buy foreign currency ETFs. Right now I would recommend CurrencyShares Australian Dollar Trust (Symbol: FXA), Japanese Yen Trust (Symbol: FXY). Swiss Franc Trust (Symbol: FXF)
Buy foreign physical cash. Remember, cash is king.
Short the blue chips. I recommend American International Group (NYSE: AIG), Bank of America (NYSE: BAC), Caterpillar (NYSE: CAT). JPMorgan Chase (NYSE: JPM), and Walt Disney (NYSE: DIS).
Buy foreign bonds. I recommend Australian or Swiss bonds.
Whatever you do, make a concerted effort to limit your exposure to the US dollar.
Good Investing,
Luke Burgess
www.GoldWorld.com