Buy the U.S. dollar, because it’s going to gain strength going forward, or so say the mainstream. The reasoning behind this investment strategy (1) is very simple: the central banks of major economic hubs are working to devalue their currencies.
As a result, there will be a rush to buy the U.S. dollar—it’s proven to be safe in the past. Just look at Japan, for example; it continues to be in favor of printing, which is why you should sell the Japanese yen. The European Central Bank (ECB) has hinted it might go ahead with quantitative easing—sell the euro. Others, like Australia, have already lowered their interest rates, and while they haven’t started printing yet, but say they are open to it—sell the Australian dollar.
In the short run, these investment strategies may be viable. In fact, since late October, we have been seeing the U.S. dollar gain strength compared to other major currencies. Please look at the chart below of the U.S. dollar index.
Chart courtesy of www.StockCharts.com
I question if this strategy of buying the U.S. dollar is going to be profitable in the long run. Those who are looking at the fundamentals of the U.S. dollar from a long-term perceptive will agree with me that they are looking very bleak.
First, the printing continues. We heard from the Federal Reserve that it will continue to print U.S. dollars in exchange for government bonds and mortgage-backed securities (MBS). Sadly, what many don’t realize is that even if the central bank says it will taper, it simply means it will be printing, just at a slower pace. What this printing eventually does is devalue the U.S. dollar and create monetary inflation.
Secondly, the budget deficit of the U.S. government continues to remain high. We heard in the fiscal year 2013 that the U.S. budget deficit slowed to $680 billion from over $1.0 trillion in 2012, but I say the damage has been done. After the financial crisis struck the U.S. economy, the government came and spent; as a result of this, the U.S. national debt has surpassed $17.0 trillion. The greater the budget deficit the U.S. government incurs, the higher the national debt is going to be. This phenomenon eventually increases the chance of the government defaulting on its debt, resulting in creditors selling their bonds and flooding the markets with U.S. dollars.
Last but not least, there’s simply no economic growth in the U.S. economy. The misery of the average Joe remains: he continues to work at a low-wage-paying job and needs food stamps because he can’t afford even the most basic needs with his income.
The U.S. dollar may excel in the short run because the general consensus is that it’s a good trade, but I continue to be skeptical over its long term performance. Looking at the fundamentals, the U.S. dollar appears weak, and as we see more of the same in terms of printing, budget deficits, and higher national debt, it’s going to deteriorate further.
With the U.S. dollar’s fundamentals becoming anemic in the long term and other major central banks promising to print more (they all want to devalue their currencies), I see only one currency that will shine as a result. No, it can’t be printed out of thin air. I am, of course, talking about gold bullion. History suggests that the precious metal provides investors safety from uncertainty and the devaluation of currencies. This time, it won’t be any different.