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| WILL "BUY AMERICA" BECOME THE WORLD'S NEW MANTRA?
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No sooner had the ink dried
after the major nations signed the Bretton Woods Agreement
in 1944, than the U.S. dollar ascended to the role of the
world’s undisputed supreme currency. This was a time
when the horrors of World War II were ending and the world’s
currencies were tied to gold via the gold standard. Yet, with
the stroke of a pen, the U.S. dollar was elevated to a position
of equality with gold. No longer would the major industrial
nations solely need to stockpile gold as a backing for their
currencies. Now, they could commingle their dollar credits
with those of their heretofore sacrosanct hoards of gold.
They no longer were fettered by the need to possess gold as
the sole backing of their currencies. They no longer had to
hold stores of gold that they were forced to part with when
settling balance of payments imbalances. For the U.S. dollar
could now stand in the place of gold and was indeed deemed
as good as gold in the eyes of the major governments of the
world. In so doing, the United States was vaulted to the position
of the most powerful nation in the world.
The reason that the U.S. dollar was allowed
to rise to a position of equality, was that the dollar was
largely backed by an unprecedented hoard of gold. This was
held in the coffers of the U.S. At the time, the dollar was
fully redeemable for gold and, whenever dollars were returned
to the U.S. Treasury, they were immediately converted to gold.
Further, the U.S. was blessed with a number of years when
they enjoyed an impressive series of balance of payments surpluses,
compared with their embarrassing huge deficits of today.
By 1944, the United States had convinced the
other world powers that the dollar was indeed as good as gold.
Further, it was easier to settle balance of payments disparities
with either paper or electronic dollar transactions than with
the movement of gold coins or bullion. This is the fashion
in which balance of payments deficits had been handled for
generations. This agreement removed the need for governments
to possess a sufficient quantity of gold to act as the backing
for their own currency balances.
The early years after the institution of the
Bretton Woods Agreement saw the U.S. continue to honor their
commitment to maintain the integrity of the dollar. In fact,
they continued to add to their hoard of gold until I believe
about 1950, and to generate balance of payment surpluses.
However, the ability to get something for nothing proved too
tempting for our nation’s leaders. By the mid-1960's,
the U.S. had sufficiently expanded the U.S. money supply so
that “creeping inflation” had reached an annual
level of about 3%-4%. Additionally, the large balance of payments
surpluses that marked much of the 1930's through the1940's
and into the 1950's, had turned into growing deficits. This
did not go unrecognized by all of the world’s leaders.
President Charles De Gaulle of France was among
the first major governing officials to aggressively exchange
the dollars that piled up on French shores for gold. Simply
put, when one nation (the debtor) purchases a greater amount
of goods and services than it sells to another country (the
creditor), an outflow of currency occurs from the former to
the latter nation. This creates a balance of payments deficit
in the debtor and a surplus for the creditor. The result is
that the creditor nation accumulates a surplus of the debtor’s
currency. Under the gold standard, gold was utilized to essentially
reimburse the creditor country with something of enduring
value for the excess goods and services that were acquired
by the debtor.
By the 1960's, the United States had become
a debtor nation as an increasing number of dollars regularly
left our country. During that decade the U.S. gold hoard steadily
dwindled as creditor nations exchanged their acquired dollars
for gold. France was in the forefront of this process. Charles
De Gaulle was among the first to astutely recognize that the
U.S. was gradually depreciating the dollar. He elected to
acquire gold at the then prevailing $35 an ounce price, rather
than hold dollars that were steadily losing value due to the
continual 3%-4% U.S. inflation rate. This was especially critical
because during that era the world’s primary currencies
had fixed exchange rates with one another. Later, on August
15, 1971, when the U.S. had lost much of their gold reserves,
President Richard M. Nixon “closed the gold window”.
With another stroke of a pen he severed all dollar ties with
gold. On that date he announced to the world that the U.S.
would henceforth not redeem its currency for gold. From that
day forward all vestiges of the gold standard were abandoned
and the duty to maintain the integrity of the U.S. dollar
was placed solely in the hands of our governing officials.
On that fateful day, the world lapsed into a
pure dollar standard in which governments could both back
their individual currencies and settle balance of payments
deficits with the now almighty U.S. dollar. This opened the
door for an uncontrolled expansion of the money supplies of
not only the United States but of all of the major, and most
of the lesser countries of the world.
The removal of the discipline of gold as a means
to check the unfettered creation of paper money, has led to
the over issuance of U.S. dollar credits. This in turn is
the primary reason for the dollar’s present decline
on world markets. It is simply an issue of supply and demand.
As oceans of new dollars are brought into existence it cheapens
those that already exist.
Until recently, our major trading partners have
been satisfied to accumulate our dollars in exchange for the
valuable goods and services that they sold to our nation.
Many of the dollar credits that leave the U.S. are returned
by their foreign holders and are invested in U.S. Treasuries.
This benefitted non-U.S. dollar holders during the 1995-2001
period, because the dollar increased in value and their dollar
denominated Treasuries not only paid interest but became worth
more in their native currencies. Now, this condition has changed.
Since 2001, the steep decline in the U.S. dollar
compared with the currencies of our major trading partners
is now hurting them. Their dollar holdings have been steadily
losing value against their own monetary units. This places
foreign dollar owners in a dilemma! Should they continue to
maintain or increase their dollar positions while they sustain
further exchange losses, or should they use at least some
dollars to acquire other assets that might maintain their
value? What are their best options, and what are they likely
to do?
First, they can use their U.S. dollar hoards
to acquire their own currencies. However, if they take this
direction they will further weaken the dollar against their
own monetary units. This in turn will damage them as it will
generate additional losses to the dollars that they continue
to hold. Further, it will cause their monetary units to continue
to appreciate. This will make their products more expensive
in dollar terms and may price their goods and services out
of the market and injure their already weakened economies.
Second, they can acquire gold or other strong
currencies such as the Euro. This is certainly already occurring
and is an important reason for both the Euro’s and gold’s
strength and their secular Bull Markets. Finally, they can
begin to purchase dollar denominated assets.
The latter option is not a new one. If you will
recall, during the latter half of the1980's, a wave of foreign
purchases occurred of American real estate and businesses
as well as irreplaceable works of art and other items that
ultimately found their homes across one of the great oceans.
This “buying of America” was led by the Japanese,
and at times a certain amount of U.S. outrage occurred as
asset after asset was being gobbled up by our foreign trading
partners. During this era, landmarks such as Rockefeller Center,
Pebble Beach as well as Universal Pictures were acquired by
the Japanese. Further, large U.S. factory complexes were purchased
by foreign entities that allowed them to assemble and manufacture
items such as automobiles for sale to the American market.
I believe that the dollar’s secular
Bear Market is destined to foster a similar period of foreign
demand for U.S. enterprises, projects, properties and possibly
national treasures. As the U.S. monetary unit’s decline
extends it will force an increasing number of U.S. dollar
holders to reevaluate the desirability of holding a steadily
depreciating currency. It is likely that as this decade unfolds
a trickle of foreign purchasers of U.S. assets will swell
into a mad rush. This, as foreigners strive to exchange their
steadily depreciating dollars for both tangibles such as gold,
silver, various commodities, as well as dollar denominated
items that possess intrinsic or eternal value. In the end,
the U.S. may find various foreign entities owning some or
many of our most valuable and treasured assets.
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The above was excerpted from the February
2004 issue of Financial Insights © January 18, 2004.
I publish Financial Insights. It is a monthly
newsletter in which I discuss gold, the financial markets,
as well as various junior resource stocks that I believe offer
great price appreciation potential.
Please visit my website www.financialinsights.org
where you will be able to view previous issues of Financial
Insights, as well as the companies that I am presently following.
You will also be able to learn about me and about a special
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CAVEAT
I expect to have positions in many of the stocks
that I discuss in these letters, and I will always
disclose them to you. In essence, I will be putting my money
where my mouth is! However, if this troubles you please avoid
those that I own! I will attempt wherever possible, to offer
stocks that I believe will allow my subscribers to participate
without unduly affecting the stock price. It is my desire
for my subscribers to purchase their stock as cheaply as possible.
I would also suggest to beginning purchasers of these stocks,
the following: always place limit orders when making purchases.
If you don't, you run the risk of paying too much because
you may inadvertently and unnecessarily raise the price. It
may take a little patience, but in the long run you will save
yourself a significant sum of money. In order to have a chance
for success in this market, you must spread your risk among
several companies. To that end, you should divide your available
risk money into equal increments. These
are all speculations! Never invest any money in these
stocks that you could not afford to lose all of.
Please call the companies regularly. They are
controlling your investments.
FINANCIAL INSIGHTS is written and published by Dr. Richard
Appel and is made available for informational purposes only.
Dr. Appel pledges to disclose if he directly or indirectly
has a position in any of the securities mentioned. He will
make every effort to obtain information from sources believed
to be reliable, but its accuracy and completeness cannot be
guaranteed. Dr. Appel encourages your letters and emails,
but cannot respond personally. Be assured that all letters
will be read and considered for response in future letters.
It is in your best interest to contact any company in which
you consider investing, regarding their financial statements
and corporate information. Further, you should thoroughly
research and consult with a professional investment advisor
before making any equity investments. Use of any information
contained herein is at the risk of the reader without responsibility
on our part. Past performance does not guarantee future results.
© 2003 by Dr. Richard S. Appel. All rights are reserved.
Parts of this newsletter may be reproduced in context, for
inclusion in other publications if the publisher's name and
address are also included for credit.
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