The Hindu Business Line : Gold, the ultimate dollar hedge

A headline in Daily Times, Pakistan `7 hours ago' reads, `Rupee appreciates vs dollar.' And Daily FX, NY has a 5-hours-old headline on `Risks to US Dollar Strength'. Writing in a January 26-dated article on www.businessnorth.com, Wayne Nelson observed that since early 1992, `the US dollar has lost a third of its value to the euro and nearly 20 per cent relative to the nation's largest trading partners.' The No. 1 culprit in the dollar's fall, according to Nelson, is the big US deficit, be it of trade or budget.

"As the dollar continues to weaken against other currencies, it is increasingly clear that this event will have a significant impact on investors and consumers around the world," notes Addison Wiggin in The Demise of the Dollar... and why it's great for your investments, from Wiley. `The twilight of the Great Dollar Standard Era is upon us,' he declares. "American consumers face the spectre of losing value in their retirement savings, finding out they cannot live on a fixed income, and suffering from chronic hyperinflation."

Wiggin considers three possibilities that can create `a sudden, wrenching drop in the dollar's value'. The first is the dropping of US dollar reserves by foreign countries. "For example, in February 2005, South Korea announced that it will stop holding US dollars and bonds in its reserves." China, which is estimated to hold more than two-thirds of its $1 trillion forex reserves in dollar-denominated securities, is said to be thinking of paring dollar dependence. India's reserves have been a story of excess, of late. The second possibility that Wiggin mentions is a catastrophic rise in oil prices. "For example, if terrorists were to contaminate large reserves with nuclear radiation, the supply of oil would drop and prices would rise... If oil prices do rise, it will affect not only what you pay at the pump, but many other prices as well." And the third possibility is `the double whammy of trade and budget deficits'. That is, the government spending is higher than tax revenues, and imports exceed exports.

"Even as our economy burns, our political leaders fiddle. They point to economic indicators to prove that our economy is strong and getting stronger. This information would be valuable... if only it were true," rues Wiggin, talking about the US economy. No different closer home?

The author also laments that few people, `even those who consider themselves to be savvy about finance', understand matters such as `trade deficit, national debt, GDP (gross domestic product), inflation, economic indicators and so on.

Valuable guidance.

Take for example GDP. The usual formula says `GDP = consumption + business investment + what the government spends + exports - imports.' GDP is an amalgam of different things, some of which contradict one another, cautions Wiggin. So, `look at the trends in the different pieces that make up GDP,' he advises.

Watch out; importance of high-tech industries is often over-hyped, though `in terms of sales, employment, and earned profits,' the sector may be of minor importance. Citing Andy Kessler's phrase `iPod Economy,' Wiggin warns that it may be deceptive to measure production on the basis of high-tech industries. Are there lessons for India?

The book has chapters that are interestingly named, such as `pathological consumption', `short unhappy episodes in monetary history', `the helicopter theory', and `attention to deficits disorder'. In the final chapter, Wiggin sounds an alarm: "The near future could prove to be a financial disaster for everyone who continues to have faith in the strength of the dollar. In fact, a collapse is inevitable and it's only a question of how quickly it is going to occur."

The ultimate dollar hedge is gold, he counsels. "Investing in gold through ownership of the metal itself, mutual funds, or gold mining stock provides the most direct counter to the dollar. As the dollar falls, gold will inevitably rise."

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