The Amazing Vanishing Dollar Act and Its Opportunity

It’s just after World War II and the strength of the U.S. military reigns supreme around the world. With the end of the war, a construction and manufacturing boom starts in the United States that will last at least half a century.

As the “empire” grows, its currency becomes the hallmark that all world currencies are to be measured against. By the time President Richard Nixon is in office, the U.S. economic machine is so strong the U.S. dollar is no longer backed by gold bullion.

Central banks across the world slowly start to get rid of their gold and make the U.S. dollar their official reverse currency. One needs to understand the strength of the U.S. economic machine: By the end of the 1990s, 70% of world central banks hold American dollars as the official reserve currency. (No wonder gold prices were tanking at the same time.)

By the early 2000s, although the U.S. economy remains dominant, factors in the marketplace start to change. Halfway around the world, in a country called China, a new, younger and open-minded regime was taking over. The country of billions starts manufacturing cheap goods and shipping them to America to satisfy the low-price needs of Americans. Sam Walton’s Wal-Mart, which accounts for eight percent of all U.S. retail sales, is more than happy to delivery what American wanted: cheap, imported goods that work.

Then 9/11 happens and the U.S. is proven to be vulnerable to the rest of the world. President Bush decides to invade first Afghanistan and then Iraq at the cost of billions of dollars a month. Two things happen: our trade deficit goes out of whack because of the Chinese imports and, for the first time in a century, we are importing more than we are exporting. Next, we pile up the biggest deficit in our history to fight the war on terrorism. It now takes two billion dollars a day more to run the U.S. government than we take in!

In a nutshell, we have gone from being a creditor nation to a debtor nation, and that is what has hurt our currency. The U.S. Dollar Index (DX, NYBOT), which measures the U.S. dollar against other world currencies, has steadily dropped from 120 in 2001 to 75 in 2008.

If you are sitting somewhere in the U.S. and don’t travel much, the lower valued U.S. dollar has not meant much to you…yet. But you are missing an opportunity now. You are missing the gains that foreign currencies are making against the U.S. dollar, and if you haven’t bought into gold yet, you are missing a huge opportunity, as it is the “currency” that will ultimately rise the most against the U.S. dollar.

I write about gold enough, so I won’t get into that today. But I will say this: there is a huge opportunity in foreign currencies awaiting astute American investors today. I’m not coming out and saying that you should buy or trade foreign currencies; what I am saying is that you should buy foreign-denominated investments. Don’t buy stocks just on the U.S. exchanges — buy them on foreign stock exchanges, so you can make more profit as the U.S. continues its long decline against other world currencies.

While I see many of my fellow economists and analysts investing in Brazil’s currency, I prefer the Canadian dollar. Canada does not run on a federal deficit, but on a surplus. They have strong economy and the best quality gold stocks and oil stocks are listed on their main exchange, the TSX (their equivalent of the NYSE). Since 2002, the Canadian dollar has risen 54% against the U.S. dollar…with more gains, I believe, to come.