BALTIMORE, MD -- It looks like the U.S. dollar is falling into a long-term death spiral. Over the past few weeks the greenback has experienced significant devaluation. And the carnage is far from over.
I was still in college when I made my first significant gold bullion purchase. In my sophomore year I sold my car and bought seven one-ounce gold coins - at that time selling for nearly $300 a piece - while taking a U.S. economic policy course.
I didn't need a car in college as the school, pub, and 7-11 - the bare necessities of collegic life -- were all in walking distance. And I knew if I didn't do something constructive with the money, I'd blow it gallivanting and painting the town red.
Of course when I bought the coins all my buddies laughed at me calling me almost every name in the book...none of which were very flattering.
And they laughed even harder a few weeks later when I told them that I took that bullion to a family-owned mountain-house in West Virginia and buried it.
I guess I could've put the gold in the safe I have there. But there was something about hiking deep into the woods with that shovel and gold...something...romantic.
That was several years ago. And now the same guys who laughed at me are whistling a different tune.
Timber!
The U.S. Dollar Index, which averages the exchange rates between the greenback and six other major world currencies, has shed nearly 10% over the past 12 months. Notably, about half of that has taken place since mid October.
At last look, the index was sitting at about 83.00. A drop below 80.50 would represent a multi-decade low.
A slowdown in the U.S. economy and declining GDP, in tandem with oil-driven inflation and current housing woes, will certainly erode the dollar's value even further.
Things are bad for dollar bulls now. And they only get worse . . .
According to the latest quarterly review from the Bank for International Settlements (BIS), oil-producing countries have reduced their USD exposure to the lowest level in two years. Crude exporters are reportedly shifting oil income into euros, yen, and sterling as a hedge against a continuing tumble in the USD.
The BIS confirms that Russia and members of OPEC have cut their dollar holdings from 67% in the first quarter to 65% in the second. A 2% cut may seem modest. But the move indicates crucial information for the USD outlook.
While dumping the dollar, the oil giants have increased their holdings in euros from 20% to 22% across the board. This shift has certainly added to the dollar's recent weakness, which has fallen to a 20-month low against the euro and a 14-year low against sterling.
The BIS is generally cautious with its language-unlike Michael Richards. Yet in the quarterly report it noted, "While the data are not comprehensive, they do appear to indicate a modest shift over the quarter in the US dollar share of reporting banks' liabilities to oil exporting countries."
The review showed that U.S. dollar deposits belonging to residents of Iran and held in banks in developed European countries decreased by $4 billion. Similarly, residents of Saudi Arabia reduced their U.S. dollar deposits in banks in the United Kingdom by $3 billion, while increasing those in yen by a similar amount.
Elsewhere, residents of Ecuador, Indonesia and Qatar reduced their U.S. dollar deposits in BIS reporting banks by $2.3 billion, $1.9 billion and $2.4 billion, respectively.
Overall, OPEC's dollar deposits fell by $5.3 billion, while euro- and yen-denominated deposits increased by $2.8 billion and $3.8 billion, respectively. Placements of dollars by Russians rose by $5 billion, but most of their $16 billion additional deposits were denominated in euros.
To read the BIS quarterly report yourself, click here.
Conclusion
U.S. equity investors would be wise to add significantly to international holdings as well as into hard assets. In particular, I continue to like the upside of Canadian and Australian mining stocks.
Until next time,
Luke Burgess
Gold World
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