Mark Whitehouse wrote an excellent article in the Wall Street Journal Online Dollar May Resume Slide As Foreign Oil Producers Invest in Other Markets (subscription required). It is an excellent article for two reasons: one, it highlights what many believe is the precarious position of the U.S. dollar; and second, for those that believe the U.S. dollar is vulnerable, an investment in commodities or precious metals such as gold and silver might serve as an excellent hedge.
The value of the U.S. dollar has big implications for the global economy. It's also profoundly hard to predict. Still, some intrepid economists believe they have an insight: Follow the oil money.
Over the past few years, the rising price of oil has shifted a big chunk of the world's wealth into the hands of exporters from the Middle East, Latin America and Russia, making their investment decisions an important driver of global markets. Their penchant for dollar-denominated investments has helped buoy the U.S. currency, confounding economists' predictions that the U.S.'s growing debts must eventually scare investors away and cause the dollar to fall.
Now, though, some economists expect oil producers to shift their investments away from dollars, allowing the U.S. currency to resume a slide that started back in 2001. They cite a litany of reasons: renascent economies in Europe and Japan, political reactions in the U.S. against foreign investment and those nagging U.S. debts, among other reasons.
According to the article, the U.S. needs to attract $800 billion worth of investment annually just to tread water and keep the currency stable. Put differently, that is about $2.2 billion per day, every day of foreign investment. Numerous pundits have flagged this issue for some time now with little or no consequence. No one knows when or if it will become an issue. Investors should, however, continue to watch the U.S. dollar carefully.
Although the article does not discuss hedging currency risk through precious metals, precious metals are often purchased for this very reason. Should the currency fall, the precious metals should retain their value and serve as a hedge. And if the U.S. dollar begins to slide precipitously and cause angst in the U.S. and around the world, I would expect more money to flow faster into precious metals.
One cautionary note: I have found that it is easy to find the flaws and worries in the economy and in investments in general. There are always problems. There are always difficulties. There are always dangers looming. I do not think one should be blinded by the challenges and not see the positives, of which there are many. The economy appears to be doing well, business confidence is strong, unemployment is low, are interest rates are reasonable, just to mention a few. However, as an investor, you need to be try to stay a few steps ahead. I myself have found the last few months particularly difficult to form an overall thesis. I see both the positives and negatives and securities in my portfolio reflect both positives and negatives.
Leave a comment