— “Profit Confidential” Column, by Michael Lombardi, CFP, MBA
With the hope that my readers do not find this too boastful, I have to say that the financial world and economy are unfolding just as I expected.
Over the past three years, I have written extensively about my belief that the U.S. dollar would fall in value against other world currencies. My fear has always been the ever-rising increase in U.S. government debt and how America’s mighty decent from a creditor nation to a debtor nation would affect its currency.
As I sit down this early morning to write today’s column, the U.S. dollar is at a fresh, new 14-month low against most currencies. What happens now with the dollar and why does it matter to investors like you and me?
A slowly falling U.S. dollar helps out American exporters. But a dollar that declines too quickly in value makes our creditors nervous. To investors, this is important, because if the U.S. dollar goes into a free-fall against other world currencies, interest rates in the U.S. will rise to support the dollar and this will hurt the stock market and the investment portfolios of most investors.
Just as important to investors: the declining value of the U.S. dollar is a boost for gold prices. My loyal readers know that I have been pushing gold-related investments since 2003, when gold traded at about $300.00 an ounce. The bottom line is that there is no alternative to the U.S. dollar as a reserve currency except for gold bullion.
China has fully grasped the logic of gold being the real reserve currency of the world. Hence, China has been promoting gold investments to its own citizens. And with China producing about half the gold that is produced in the world each year, it makes sense for China to see gold bullion as the world’s official reserve currency, not the U.S. dollar.
The long-awaited decline in the value of the U.S. dollar is well underway, the repercussions of which will eventually be higher interest rates and continued strength in the price of gold bullion.
Michael’s Personal Notes:
In November 2006, I wrote about how deflation was the real threat to America over the next two years. The minutes of the Federal Open Market Committee show that, at that time, Fed governors were still very concerned about inflation. We all know what happened to car prices, real estate prices, and stock market prices in 2007 and 2008. Many of the analysts and advisors I read about today are now worried about deflation. Considering that gold bullion is likely one of the greatest gauges of inflation we have, at over $1,000 per ounce, does gold look like it’s more concerned about deflation or inflation?
Where the Market Stands:
So, will today be the day? The day the Dow Jones Industrial Average plows through the 10,000 level? Well, this morning we have JP Morgan Chase, the second largest U.S. bank by assets, posting profits 60% higher than analyst expectations. And we have Intel weighing in with better than expected earnings as well.
These two scapegoat events might be all the market needs to get over that psychologically important 10,000 level. So much for the naysayers who said that September and October would be difficult months. The Dow Jones Industrial Average starts today at the highest level it has been at so far in 2009 and 12.5% higher than it started 2009.
What He Said:
“I’ve been writing to my readers for the past two years claiming the decline in the U.S. property market would not be the soft landing most analysts were expecting, but rather a hard landing. My view remains unchanged. The U.S. housing bust will be cut deeper and harder than most can realize today.” Michael Lombardi in PROFIT CONFIDENTIAL, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for worse times ahead.