WILL "BUY AMERICA" BECOME THE WORLD'S NEW MANTRA?

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 subscription offer.

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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.