THE IN-CREDIBLE SHRINKING DOLLAR
By Craig R. Smith, CEO, SATC
Dec 28, 2006 [updated from 5/06]

The falling dollar is again in the news...
Long fuse of dollar crisis will be lit in 2007-Guardian
Dollar Declines; U.A.E. Selling U.S. Currency, Buying Euros -BL
Analysts: Dollar collapse would result in 'amero' -WND
Oil producers shun dollar -FT
Collapse of the Greenback -DailyFX
Depreciation in US dollar expected -ICICI Bank
Gates, Buffett and China Gang Up on Dollar -BL
OPEC Dumps the Dollar -NewsMax
How to profit on a weak dollar -CNN
Euro Leaving the Dollar Behind? -Europe.com
Makings Of A Meltdown: Dollar Stampede -BW
The passing of the buck? -The Economist
Dollar's plunge a blight, not a benefit -MSN

INTRODUCTION: The Domino Effect

The decline of the dollar has now moved into phase two: The Domino Effect. First it was Warren Buffet, then Bill Gates, then George Soros, now even central banks and OPEC are starting, one by one, to diversify out of U.S. dollars and into other forms of money. And who can blame them?

"The dollar dropped the most in more than a week against the euro after the head of the United Arab Emirates central bank said it will convert 8% of its reserves of U.S. assets into the European currency," reports Bloomberg.

"The dollar has so far lost nearly 12 percent against the euro this year, around 14 percent against sterling, and roughly 9 percent versus the Swiss franc, as investors became concerned that U.S. economic growth was slowing and that the interest rate differential with Europe may narrow. You should hold as few dollars as possible. The dollar's decline would go on for years to come," Jim Rogers told Reuters.

If a dollar is viewed as a unit of measurement for the world's confidence in America's ability to manage and reduce our trillions in debt, it's likely due for another major decline in 2007, especially since the Fed is cornered -- unable to raise interest rates further to halt inflation and unable to cut rates for fear of a dollar collapse.

"Two analysts who have reconstructed money supply data after the Fed stopped publishing it argue a coming dollar collapse will set the stage for creating the amero as a North American currency to replace the dollar," reports WND.

Devaluing the dollar is the market’s way of correcting the U.S. trade deficit. Former Fed Chairman Alan Greenspan warned us repeatedly over the last few years that either the value of the U.S. dollar... or the trade deficit... has to decline. Both cannot continue rising.

The U.S. dollar has now lost over 40% of it's buying power since 2001 -- and that was under a "strong dollar" policy from the the White House! Can you image what's in store for our debt-burdened dollar under the new unspoken "weak dollar" policy? I can.

Hold on to your wallet, a surge in the cost of living is coming at us as "real world inflaton" starts making news headlines.

Sure, it's true a lower dollar has some benefits, such as lowering the trade deficit and increasing U.S. manufacturing competitiveness abroad. "Provided the currency shift doesn’t get out of hand, a sustained but managed weakening of the dollar is good news for the global economy and world financial markets," said Morgan Stanley economist, Stephen Roach.

But the price impact of a falling dollar is heaviest upon 'We the People' who become the ultimate victims of declining dollar-denominated assets.

Investors are voting with their feet, moving in droves out of U.S. dollars and into foriegn currencies, commodities and gold. Bloomberg reported, "The real risk is that the sharper and the quicker the dollar falls that these investors will pull out pretty quickly from U.S. markets..."

THE LESS-MIGHTY DOLLAR

According to Safe Haven's Martin Weiss, "We are entering a critical new phase of the dollar's decline.

"In this new phase, not only will the dollar's value fall, but the United States could also suffer a flight of capital. Not only will you see each dollar buy less, but, more importantly, there could be fewer dollars available, as foreign investors slash the flow of dollars from Asia, Europe, and the Middle East ... or even pull their money back out.

This new phase of the dollar decline could ...

* drive U.S. bond prices into a tailspin ...
* drive up the interest rates on long-term bonds, commercial loans and all forms of mortgages ...
* crack open the U.S. housing market -- not only because of rising mortgage rates, but also because fewer foreigners are willing to speculate on American real estate ...
* force the Fed to start a whole new round of interest rate hikes to attract foreign money back to the U.S., and ...
* send contra-dollar investments -- gold, silver, oil and other commodities -- into a new, rip-roaring surge."

The dramatic rise in gold since 2001 can be viewed in two ways: The commodity bull market is bringing gold prices back to a level that represents the true market price in terms of our falling dollar, OR, the falling dollar is but one of many factors helping to support higher commodities prices back to a value that's based on the true supply-demand marketplace. Either way, gold's price surge reflects a new flight to quality assets that represent a safe haven.

$1,000 GOLD? BULL MARKET, PHASE II

Gold prices hit a fresh 26-year high of $725/oz on May 9, 2006 -- and has added another 20% growth to the precious metal just since Jan. 2006.

Gold prices are now up 135% since the 2001 low of $265/oz. -- and the gold market has had to fight for every dollar it has advanced. But a falling dollar is just one of the many techincal and fundamental reasons we're now five years into a 15-22 year secular bull market.

Wall Street recently began offering gold and silver investors a new option, "Electronic Trading Funds" (ETFs), but physical ownership of gold alone allows you the opportunity to have 100% control of your gold without a single worry that your gold ETF asset is also someone else's liability.

Article after article in the financial press are warning about dollar weakness. The dollar’s failure to react more positively to improving U.S. economic data does not bode well either.

In the meantime, the next leg of the new bull market in gold, silver and other commodities is well on it's way and should take gold prices to the $800-$1,000 level in Phase II.

"And suddenly, like the Phoenix rising from the ashes, real money, better known as gold, creeps into the consciousness of Wall Street", said Richard Russell in his The Dow Theory Letters. A reader asks, "Should I buy gold coins or ETFs?" My answer – either one will do, but, there's nothing like the real thing in your bank vault."

Richard Russell told the London Financial Times, "We are now in the second phase of the gold bull market - the phase when the public gradually becomes interested. I think gold will hit $1,000 before this bull market is over."

The next phase of this bull market has send gold prices up in ALL currencies, not just the U.S. dollar. Gold has already broken to the upside in the Yen, the Euro and the Pound.

"Europe is in the midst of another bout of angst over its currency, which has risen nearly 7 percent in the last two months, amid signs the Bush administration will tolerate a prolonged weakness in the dollar," reported The New York Times.

IS THE U.S. PURPOSELY KILLING THE EURO?

According to economist Alex Wallenwein, Editor & Publisher of "The Euro vs Dollar Currency War", "The Fed and the Bush administration know the euro's ultimate aim is by necessity to slowly attract foreign investors and central banks to the euro and away from the dollar. But they also know that an explosively upward rocketing euro will wreck the Europeans' major economies in a heartbeat." As a result, "The U.S. game is to allow the dollar to drop lower - and faster than the Europeans' fragile economies can tolerate!"

"In the meantime," Alex continues, "China and the Muslim nations are playing another game, altogether. Every time the dollar drops, they are buying gold. The lower the U.S. lets its currency fall, the more temptation the Asians feel to dump their US debt holdings, as they see their U.S. "assets" depreciate with every tick lower by the dollar on its journey into forex 'Hades.' At some point, this temptation will become overwhelming. The US is currently betting that the Asians' point of no return comes after that of the Europeans. I don't think that's a safe bet to make."

Bloomberg reports; "India and Russia have reportedly been selling U.S. assets, as well as petrodollar-rich Middle Eastern investors. China, which has $515bn of reserves, was also said to be selling dollars and buying Asian currencies in readiness to switch the renminbi's dollar peg to a basket arrangement, something Chinese officials have increasingly hinted at. Any re-allocation could push the dollar sharply lower and Treasury yields markedly higher."

HOPING FOR A DOLLAR RECOVERY?

"Is there any hope for the recovery of the U.S. dollar? If not, what will happen?" writes Jack W. to AskMrSmith.com.

MY ANSWER: Hope is based upon faith, and faith is based upon confidence and substance, at least in the financial world.

Today's dollar, devoid of any substance, is purely symbolic of the American dream. Sadly, U.S. dreamers are no longer working hard and saving, but instead, spending hard and borrowing more.

The U.S. debt limit must soon be extended from $9 Trillion to infinity, or else the "strong dollar" era will soon end.

The dollar faces two major foes in the near term; The Euro and Gold -- both of which benefit from the dollar's demise, but Gold alone is the ultimate form of money.

When confidence in the U.S. dollar finally does collapse, we will experience the deepest recession in decades, along with runaway cost of living increases (inflation) which will turn millions of American dreamers from princes into paupers... unless they have converted some symbolic money (dollars) into substantive money (gold). Read more in Chap. One of my book ... "Substance Over Symbolism: The Folding, Spindling & Mutilating of America's Money System"

$20 BILL VS. $20 GOLD

If you go back to the early 1920's, a $20 bill and a $20 gold piece worked exactly the same in our economy. It used to be that you could go down to a local men's shop and buy a beautiful three-piece suit with either a $20 bill or a $20 gold piece.

Now lets accelerate ahead in history 85 years later.

You walk into a shop with a $20 gold piece and a $20 bill, and what happens? Well, with a $20 paper bill, you'd be lucky to find a tie, but a $20 gold piece, even in poor condition is worth $750 today -- still ample enough money to buy a nice three-piece suit, perhaps two.

Did the $20 paper bill maintain buying power? No! If you look at American history, it illustrates that gold will always outperform it's paper counterpart.

Do you want to have all of your money in paper, or should you have a little of your money in real money -- gold?

Today may be one of the best (and last) good opportunities to spin some of your paper dollars into gold, before your dollar-denominated portfolio suffers another 40% decline in value over the next 5 years -- as the government continues to destroy the dollar and promote a falling U.S. standard of living.

But, there is a way to fight back! Every person in America has the ability to put themself on a personal gold standard by simply converting paper dollar into golden dollars by purchasing some physical gold coins. The new precious metal ETFs are a wonderful new gold-backed paper product for both investors and Wall Street bringing millions of new investors into the metals markets. But I still recommend clients hold at least a portion of assets in physical gold as the cornerstone of a solid foundation in their diversified portfolio. -CRS


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DISCLAIMER: All of the information in this story is believed to be true, however errors are possible. Past performance is no guarantee of future performance. All investments have risk.

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