THE IN-CREDIBLE SHRINKING DOLLAR … HOW TO FIGHT BACK!

INTRODUCTION
I. THE DOMINO EFFECT
II. WEAK DOLLAR HURTS AMERICA
III. SUBSTANCE VS. SYMBOLISM
IV. GOLD BULL'S NEXT PHASE
V. FIGHT THE FALLING BUCK

INTRODUCTION

Once upon a time... American economists used to arrogantly say, "The dollar is OUR currency, but it's YOUR problem!"

This chart shows the U.S. dollar's performance over the last 93 years. Between 1915 and 2009 the dollar has shrunk to just 3 cents! Could it fall to one cent in the future? Read on and judge for yourself.

Investors need to ask themselves four key questions right now;

1) Would you invest your life savings in a company with a track record like this?

2) Do you think the recent min-rally in the dollar will continue or is the 93-year downtrend of the buck likely to continue?

3) Do you think the trillions in government bailouts will strengthen or weaken the dollar given that we are facing an $11.2 trillion national debt which is now a record 70% of the total gross domestic product (GDP)?

4) Do you think the cost of living will continue rising or will it suddenly decline now that the world is struggling to come out of a recession?

Slow Growth and The Greenback Effect: "Unchecked greenback emissions will certainly cause the purchasing power of currency to melt" says billionaire Warren Buffet in NYTimes on 8-18-09.

Buffett continues, "The United States is spewing a potentially damaging substance into our economy - greenback emissions. The U.S. economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. Washington's printing presses will need to work overtime."

What's really at risk now is the dollar's role as reserve currency. Unless foreigners continue to buy dollar-denominated assets, the exploding US trade and budget deficits threaten to sink the US dollar. Only a truly "strong" dollar can help shrink the US deficits to a sustainable level.

Here are a more warnings ripped from the headlines...

Pimco Says Dollar to Weaken: "The world's biggest manager of bond funds said the dollar will weaken as the U.S. pumps massive amounts of money into the economy. 'The dollar will drop the most against emerging-market counterparts. The greenback is losing its status as the world's reserve currency, writes Curtis A. Mewbourne, a Pimco portfolio manager," reports Bloomberg.

"The dollar's days as the world's reserve currency are numbered. The greenback faces serious devaluation as spiraling national debt and a worsening economic crisis undermine it. Commodities are one of the only viable investment opportunities left and are set to rebound," famed investor Jim Rogers told CNBC back in 2008.

"The almighty dollar is mighty no more. It has been declining steadily for six years against other major currencies, undercutting its role as the leading international banking currency," reports CNN.

"The dollar is the barometer for Fed credibility," said Tim Bond, head of global asset allocation at Barclays Capital in London to Reuters. Caught between a fragile economy and banking system and rising inflation -- Bernanke and the Fed seem to have arrived on a strategy of jawboning the dollar higher.

"The US dollar is now standing on the edge of the precipice. Get ready for whatever the central banks throw at us by their mismanagement of national currencies. Own gold and silver," writes James Turk of Goldmoney.com.

"World leaders are coming under pressure to ditch the fast-declining dollar, one of the greatest causes of global inflation today," reports Massoud Hedeshi, international development expert.

I. THE DOMINO EFFECT

The decline of the dollar is now moving 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. Who can blame them?

According to the Federal Reserve, the dollar has dropped by almost 65% against the euro, 31% against the British sterling, 45% against the Canadian dollar, and by 59% against the Australian dollar over the eight-year period since June 2000.

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 2009. The Fed is cornered -- unable to raise interest rates further to halt inflation and unable to cut rates for fear of a dollar collapse.

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 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 inflation starts making news headlines.

Sure, it's true a lower dollar has some benefits, such as 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 foreign 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..."

According to SafeHaven.com founder 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."

II. A WEAK DOLLAR HURTS AMERICA
By Carl Delfeld, Chartwell ETF Advisor, Forbes.com

First, a weaker dollar translates into a cut in the real spending power of American consumers -- in effect, a reduction in real income.

Second, a weaker dollar weakens the role of the U.S. dollar as the world's reserve currency. Why should investors and central banks around the world invest in US assets when their value is steadily declining?

Third, the chances of a weaker dollar leading to a sharp reduction in America's trade deficit is highly unlikely since 40% of the current balance is due to oil imports that are denominated in U.S. dollars. An additional 20% is due to trade with China, which is, of course, controlling the value of its own currency.

Fourth, a weaker dollar is inflationary since it increases the cost of imports.

Fifth, business leaders know that discounting prices may bump near-term revenue and profits but at a real cost to long-term profitability, not to mention inflicting damage to the brand name. This is what we are doing to the brand of America by trying to increase exports by lowering their price in the global marketplace. Better to stand firm on price and sell into global markets on the basis of what is great about American products: superior quality, innovation and service.

Sixth, investors seem to like a weaker dollar since the profits of American multinationals get a boost from foreign earnings being translated into U.S. dollars. Again this is short-term thinking and vastly overstated since most multinationals have sophisticated treasury departments that hedge currency exposures.

What a weaker dollar really does is to encourage American and international investors to invest in non-American markets. The more the dollar drops, the more global equities rise. Many Asian currencies are hitting record highs against the U.S. dollar.

The Australian dollar has climbed to a 25-year highs, while the Singapore dollar has touched 10-year highs. The Brazilian real, which has jumped 18% in value against the U.S. dollar this year, and the Indian rupee's sharp appreciation against the U.S. dollar during the past year, have supercharged U.S. dollar investors' returns in those markets.

Foreign investors slashed their holdings of U.S. securities by a record amount as the credit squeeze intensified, according to the U.S. Treasury Department. The Treasury said net sales of U.S. market assets--including bonds, notes and equities--were $69.3 billion in August after a revised inflow of $19.5 billion during July. The August outflow exceeded the previous record decline of $21.2 billion in March 1990.

Last and perhaps most importantly, I view a policy of weakening the U.S. dollar to improve America's competitive position as the path of least resistance.

Let's not roll up our sleeves and cut federal spending, greatly simplify our tax code to encourage productivity and achievement or reduce corporate tax rates and excessive regulation. Let's just wink and weaken and let our nation's currency drift lower on automatic pilot.

My view is that the value of a nation's currency reflects the perceived value of country in the global marketplace. Maintaining and strengthening the value of our nation's currency is in the best interest of American consumers, businesses and investors.

"Strong Dollar, Strong Currency" is more than a mantra for me since economic history indicates that no country has ever achieved greatness nor maintained it by debasing its currency.

III. SUBSTANCE VS. SYMBOLISM

Historically the U.S. "dollar" was defined by content, not by image, or symbolism alone. Truth is, today's "dollar" is really nothing more than a popular symbol for the substances which it once proudly represented: gold and silver.

A real U.S. dollar is defined as 1/20 ounce of gold, or about an ounce of silver. But starting in 1913, the U.S. Treasury and Federal Reserve began a slow process of redefining the "dollar" -- from representing a weight measurement of pure precious metals -- to representing public confidence in the U.S. government.

The result: today's "dollar" retains a mere 3 cents of its original buying power in relation to gold. Three pennies! Stated in reverse, 1/20 of an ounce of gold (at $940/oz.) will cost you $47.00 today, instead of just $1, as it did 75 years ago. Sad, but true.

The true value of a paper "dollar" is now being defined by the world's waning confidence in America's ability to repay our deficits, debt and public entitlement obligations.

America's former head accountant David Walker traveled the nation with his "Wake Up Call" tour in 2007 warning Americans that we're facing, "a growing fiscal cancer, a tsunami of spending." Walker hoped to gain public support in order to force politicians to do something now, rather than just kicking the can down the road.

"Anything that's healthy is reproducable" is a truism, both in the natural world and in the financial world. Conversely, anything that's unhealthy (whether it be animal, vegetable, mineral... or currency) cannot produce healthy offspring.

Virtually every nation on earth is slowly dumping dollars in favor of more stable, healthy currencies, like gold. Unhealthy U.S. dollars are even being shunned by central bankers, because they know what happens to all confidence-based currencies when that confidence fails. In financial terms it is called a panic.

Given today's increasingly transparent financial world, I ask you; does the monetary symbolism of today's paper "dollar" stand a chance of triumphing over the substance of gold and silver? If you think so, stick with your paper "dollars", but don't complain when a loaf of bread costs $10 or $20 one day.

If you think not, we recommend converting a good portion of your paper dollars into gold, pronto. Given the dollar's 100-year track record of decline, it's very plausable that the dollar will continue falling from 3 cents to just a single penny. At that point instead of costing $47.00 to buy 1/20 ounce of gold, it may cost $100 per 1/20 ounce of gold... which equates to $2,000 per ounce 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 into a local men's clothing 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 over $1,000 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 its paper counterpart.

The dramatic rise in gold since 2001 can be viewed in two ways:
1) 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,
2) 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.

IV. GOLD BULL'S NEXT PHASE

We Americans have been trained to think, live and plan short term, but economic cycles often change unnoticed and run 15 to 20+ years. Stocks enjoyed a great run, greased by low interest rates and inflation from 1982 to 2000, then the bottom fell out. Commodities kicked in starting in 2001 and have been rising ever since.

Prudent investors and savers are discerning this change and adjusting their portfolio accordingly. Although some speculation has boosted the cycle and periodically must be purged, the trend toward higher energy, food and metals prices may not end until 2024.

Gold prices have now more than tripled 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 technical and fundamental reasons we're now eight years into a 15-23 year secular bull market.

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 well above $1,000 an ounce. The next phase of this bull market is sending 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.

"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 Dow Theory Letters.

A reader asks Russell, "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. We are now in the second phase of the gold bull market - the phase when the public gradually becomes interested."

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 further.

"If Israel attacks Iran expect $200 oil and $1,100 gold overnight. The Iranians will shut the strait of Hormuz instantly and 25% of the world's oil will stop flowing," said Swiss America CEO Craig R. Smith.

"The destiny of a currency determines the destiny of a nation," according to Dr. Franz Pick, a noted free market economist.

With today's dollar retaining a mere three cents of it's original buying power a century ago, it's easy to see why the world sees the U.S. as a nation in decline. Debtors become slaves history teaches us. Reversing the dollar's decline seems remote, given our debt and deficit addictions.

Gold is now the world's only currency that has retained a store of value over time, buying roughly the same goods or services today as it did 300 years ago.

V. FIGHT THE FALLING BUCK

But, there is a way to fight back! Every person in America has the ability to put themselves on a personal gold standard by simply converting paper dollar into golden dollars by purchasing some physical gold coins.

The handwriting is on the wall in America! Inflation is coming back. It is only a matter of to what degree. Will it run 14%-16% like it did in 1979-80, or will it be closer to early 2008 wholesale producer price index (PPI) numbers at just under 10%? Or will it turn into hyperinflation, as we have seen in third world countries or Weimar, Germany?

This explains why gold prices have soared over $1,000 an ounce in 2009, as international investors moved to a defensive position to keep inflation from eating away at the dollars they cannot sell in the current market condition.

In July 2007, Swiss America warned investors that the Dow at 14,000 was not a milestone, but rather a mirage concocted of smoke and mirrors. Our advice today is to be prepared for another 15% correction in stocks, taking the Dow below 10,000.

"In 25 years on Wall Street, I have never seen things this bad. Sell everything. Nothing's working. Revisit when the prices are adjusted for a big recession, soaring inflation, and a crushed consumer. Sell at 12,000 and come back at 10,000. Even better: short it," said Thestreet.com founder and perma-bull Jim Cramer.

Today the world is holding trillions of U.S. dollars and savvy investors are choosing to defend their holdings against another round of inflation. Commodity prices will continue to climb until the Fed moves to defend the dollar, which is unlikely to happen before the next presidential election.

The only answer to the current problem would be for Congress to cut back on spending and reduce deficits, which would boost the dollar. However it appears the deadbeats in Congress would rather play politics than fix the problems we face as a nation.

The next 3-4 years under the Obama Administration the government will likely continue destroying the dollar, further reducing the U.S. standard of living.

This current economy could get very bad, very fast. Then it will be too late to do anything but suffer the pain that comes in a prolonged period of rising inflation. Americans will face a lower standard of living and a pared down retirement unless they act now to cut personal spending, save money and own more tangible assets.

In our view owning gold is no longer a luxury, but rather a necessity. Investors should be more concerned about the buying power of their dollars than high returns. Call a Swiss America broker today to discuss how to protect your assets from further dollar declines at (800) 289-2646.

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