The US economy is growing at quite a reasonable rate, and so are corporate profits.   As a result, I like the fact that most investors have a solid exposure to one of the biggest economies in the world.  

 Unfortunately, there is a dilemma…………  I like US stocks, but not US dollars .

 As most investors have recognized, the US dollar has weakened over 15% in the last two years alone (which is easily seen in our conversion rate to the US dollar:    Today, it costs $1.15 to buy one US dollar.   March 9, 2004 the rate was $1.34 ).

 The bigger question, of course, is WHY is the dollar falling?

 It is my opinion, that the currency markets are finally starting to reflect the severe mismanagement of US monetary policy.    The US Federal Reserve is essentially printing vast amounts to money (increasing the money supply) to support the American Dream.    The US trade and fiscal deficits are at all-time highs, and I mean  HIGH ! (Last year alone, M3 as a measure of the money supply, increased over $700 Billion)    Essentially, the US is living far beyond its means, borrowing more and more money every year to finance their economy.   You can only spend more money than you make for so long.   Eventually , the currency and interest rate markets will accurately “VALUE” the true worth of your currency. 

The US is the only country in the world that can print money without any short-term consequences (for now).   This is due to the universal demand for the US currency, in the oil markets.   Since 1973, all OPEC countries have settled oil transactions in US dollars.   Therefore, there has been somewhat of a “permanent” demand for US dollars, regardless of their irresponsible monetary policies.    This will not last forever.    

            i.e.   Iran is setting up its own “ OIL BOURSE”, so that they can transact

oil in  EUROS,  instead of US dollars. 

As foreign countries see their US dollars reserves fall in value, the time will come that they will want to own other foreign currencies and gold , as a more stable storage medium.   There is several rumblings today , that suggest that the central banks of India and China , have already started buying more gold, as a way to stem their US dollar losses.  

Recommendation:

I recommend that you invest 5% of your portfolio in precious metals, and particularly gold.   Gold is the only true “HEDGE” against a falling US dollar, although Warren Buffett thinks silver is also a good hedge.    (Warren Buffett currently holds over 130 million ounces of silver).

This is not a prediction of imminent doom in the US dollar,  but rather a recommendation geared towards the protection of your portfolio.   This US financial problem may well get better, or much worse………..time will tell.    Until then, I will remain diligent in assessing this problem on an ongoing basis.   We may very well be adding to this position in the future.

Best regards,

 Mike McGann

Director