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Who's Dumping Dollars Now?
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Friday, January 5, 2007
Vol. 9 No. 5 |
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In Today's Letter:
Comment: Who's Dumping U.S. Dollars Now?
Offshore: Keeping New Year's Resolution #2
Currencies: Dollar's Rallying - But for How Long?
Bonus Offshore: U.S. Offshore Investments on the Rise
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Dumping U.S. Dollars:
The New International Pastime
Today's comment is by Eric Roseman, Investment Director for The Sovereign Society and editor of both Commodity Trend Alert and Global Mutual Fund Investor.
Dear A-Letter Reader,
Add the United Arab Emirates (UAE) to the growing list of foreign central banks shedding their U.S. dollar reserves.
Since 2002, more than a dozen central banks worldwide have accelerated their dollar sales as the buck continues to slide. Since the advent of the euro in January 1999, central banks have been gradually increasing their holdings of the single European currency. But with the dollar dropping a cumulative 44% since peaking in January 2002, the selling has accelerated. In 2006, the dollar declined 11.3% versus the euro.
Last week, the Emirates announced that their relatively small foreign-exchange reserves, only US$25 billion dollars, would be pared in favor of the euro. The UAE holds 98% of its reserves in U.S. dollars.
That US$25 billion might be a puny number compared to the grand scale of total dollar reserves held by other central banks, but it's definitely a bad sign for the United States.
The other Arab Gulf states, including Saudi Arabia, Kuwait, Qatar, Bahrain, and Oman collectively have over $220 billion dollars in trade surpluses -- that cash must be invested in international markets. Increasingly, they'll also be looking for reduce their dollar-based holdings in favor of foreign currencies.
Over the last four years, central banks in China, Argentina, Russia, South Africa, Cuba, Iran, and several Gulf Arab states have cut their U.S. dollar reserves in favor of the euro and other foreign currencies.
Unless the United States addresses its massive twin deficits, the selling will continue. At some point over the next several years, the Federal Reserve will have no choice but to raise interest rates to attract foreign creditors. Deficit spending remains a major drag in Washington because military expenses in particular have mushroomed since 2002. The previous bout of military spending in the late 1960s and early 1970s (Vietnam) led to President Nixon breaking the gold standard. And that sent inflation into orbit and crushed the U.S. dollar up until 1982.
At some point, the United States must fix its balance-sheet, or foreign creditors will do the job for them.
And what about Europe? Don't get too excited about the Europeans protecting your purchasing power longer term. Over the last 18 months, gold prices have far exceeded the euro's appreciation versus the dollar. Since June 2005, the dollar has shed 9% against the euro while gold prices have soared 41% in euro terms.
In a bull market, gold is rising against all major currencies since last year. It's real money, no one else's liability and still the ultimate in purchasing power protection.
ERIC ROSEMAN, Investment Director
on behalf of The Sovereign Society
EDITOR'S NOTE: Dollars are being dumped... economies are slowing... so where should you invest your money in 2007? You can find out by dialing in to a very special teleconference on January 16th. Investment Director, Eric Roseman will co-host the teleconference with other leading Sovereign Society experts. And together they'll all share their best investment and offshore predictions for the new year. Click here to learn more.
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Only 2 Days Left to Claim Your $101,230 "Little Christmas" Present
The Sovereign Society is giving away as much as $101,230 of our most valuable trading research services.
But you must act before midnight, January 6th, to take advantage of this special offer...
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Keeping New Year's Resolution #2: Expect Better Returns Overseas
Let's face it. You usually can't find the best performing investments on Wall Street. And even when the U.S. markets perform well, as they did in the second half of 2006, there's still a whole universe of investment options available beyond U.S. borders with infinite investment potential.
You just need to know how to tap that potential. That brings us to our second New Year's resolution - expecting better returns overseas.
The very first step to grabbing those profits is just acknowledging the offshore investment opportunities and expecting more for your portfolio. Then it's just a matter of figuring out exactly how to invest offshore.
Here are a few tips to get you started with investing offshore...
1. Open your offshore bank account. It's one of the easiest ways to access the world's stocks, bonds, currencies, commodities etc. (But be careful: you should NEVER invest in offshore funds through an offshore bank without checking out the tax consequences first.)
2. Speak to a domestic attorney and offshore professional before investing offshore. This way you will be well-versed in any negative tax consequences or fees.
3. Take your retirement plan offshore. Retirement plans can invest in almost anything - including the over 50,000 global funds - that Americans should NEVER invest in without a tax-deferred vehicle (like an offshore retirement plan).
4. Invest in another tax-deferred vehicle like an annuity or offshore life insurance policy, which may be used to invest overseas.
5. Invest in a Sovereign Society membership if you haven't already done so. Our investment experts recommend both offshore and domestic investment plays each month in our monthly newsletter, The Sovereign Individual. Click here to sign up now.
ERIKA NOLAN, Executive Director
P.S. And check back on Monday to read about how to keep our next New Year's resolution: "Invest your assets outside the U.S. dollar, while you still can."
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The Dollar Rallied this Week - But How Long Will that Last?
The U.S. dollar rallied hard on Wednesday after key U.S. and European economic reports were released to the public. But was the dollar surge really warranted?
The Eurozone Purchasing Managers' Index (PMI) crept to a 9-month low of 56.5 last month and came up well shy of consensus estimates. The U.K. PMI also touched a 9-month low.
The U.S. dollar charged ahead on these tasty morsels of information. The markets acted as though European Central Bank (ECB) Governor Trichet promised rate cuts and Fed Chairman Bernanke swore to rate hikes at their respective upcoming meetings. Haha. Fat chance!
Europe's carrying plenty of economic momentum into 2007. Some currency traders may expect that slower growth in the Eurozone is inevitable because of the euro's noteworthy appreciation against the U.S. dollar last year. After all, Europe's exports to the U.S. now cost more! Right?
But hasn't this been the case ever since the euro began its assault on the greenback in 2001? The European Union has been able to maintain a steady +/-2% GDP over that time. The point is, it may be a little too soon to get down on the euro and expect a shift in ECB monetary policy.
The other side of the coin isn't any easier to call. We've been watching U.S. economic developments from the housing-has-further-to-fall vantage point. Then boom! Just like that the ISM manufacturing index comes out surprisingly positive, dollar bulls come crawling out of the woodwork, and all of a sudden that's got me rethinking my perspective.
But wait. There are the reports that showed further decreases in construction spending and that the U.S. private sector cut 40,000 jobs in December. Each of these reports is an indication the real estate market sickness has begun to spread. And I find it hard to believe the dollar is out of the woods just yet.
Note how Fedspeak permeated the U.S. markets Wednesday afternoon when the Fed released their minutes from the December Federal Open Market Committee meeting. Just as we all expected, the Fed reiterated their inflation outlook (should the need arise they won't hesitate to take action) as they have so precisely in the past. But accompanying this typical rhetoric was a more gloomy analysis of economic growth. And this gloomy outlook was based largely on housing. This is a noticeable difference from the October minutes, but this tidbit of hindsight didn't offer much "new" news.
Maybe because it's the economic outlook the Fed should be concerned with. Any more signs of an economic recovery in the face of sustained inflation could mean we see rates hiked before they're cut. That bodes well for the dollar.
But until that happens, I'm going to assume the U.S. is slowing down and watching for ways I might be wrong. I suggest you do the same.
JACK CROOKS, Currency Director
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Offshore Investments by Americans Soar
A report published by the U.S. Treasury and the Federal Reserve on Dec. 29 contained the startling revelation that holdings of foreign securities by U.S. persons and companies increased 24% in 2005 from year-end 2004 levels.
The findings are from the annual survey of U.S. portfolio holdings conducted at year-end 2005. Results from this survey were only posted last week on the U.S. Treasury website at http://www.treas.gov/tic/fpis.html .
In absolute terms, the numbers are staggering. At the end of 2005, U.S. holdings of foreign securities came to US$4.6 trillion, up from US$3.3 trillion at year-end 2004. U.S. investors increased their holdings of foreign securities by more than US$900 billion in 2004 alone.
Of course, this is no surprise to those of us at The Sovereign Society. Since our formation nearly a decade ago, we've seen our membership grow from a few hundred members to more than 15,000 today. Not all of our U.S. members invest offshore, but many of them do-and these investments no doubt are included in the U.S. Treasury's statistics.
These results provide empirical proof from the U.S. Treasury that there is a massive movement of dollars out of the U.S. markets into foreign markets. This phenomenon, combined with the continuing trend of foreign central banks to decrease their holdings of U.S. dollars, can only be read as bearish for the dollar. Invest accordingly!
MARK NESTMANN, Wealth Preservation & Tax Consultant
and President of The Nestmann Group
www.nestmann.com
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