The Dollar Must Decline

Posted by Ray on August 24, 2009 under Main | Read the First Comment

The only way this market can continue its parabolic climb is if the dollar gets taken down. This morning as I watched equity futures at 6 AM I thought it was odd that the dollar had strength while futures were up. Then it happened.

Right around 7:30 the dollar began to drop as futures keep their gains, this has been typical during this new bull market. While this might make people feel better about the economy, keep in mind that the markets had decoupled themselves from equities, many may be shocked to learn that the market’s gains were at their expense. If the dollar looses value and equities go up, which is typical, then your net buying power has actually decreased which nullifies your gains.

I am sure not many people are paying attention to this fundamental fact, but nonetheless it is there and a reality. Even the likes of Cramer are not connecting the dots as he cited higher oil prices for the market’s rally last week while it had little to do with oil at all. It had to do with the decline in the dollar’s value which drove oil higher, along with significant draw downs in inventory.

I am not sure if the media is intentionally ignoring this fact or not, but it is there which also explains higher commodity prices as well. At this rate the Dow could hit 14,000 again, but your buying power will be diminished. A weak dollar is good for your multinational companies and commodities, but nothing else. I do not know about you, but I am not a fan of our currency being devalued in order to prop up a failing bank system which is exactly what is happening.

To maintain your buying power you should consider having commodities in your portfolio. I favor gold, silver, platinum and palladium, but you may favor something else like oil. It does matter what commodity you choose as you want a liquid investment with strong fundamentals. For that reason is why I heavily favor precious metals, but your risk is if a black swan emerges. If we have another 2008 event money will pour into the dollar driving commodities lower. This is why you need to be diversified between asset classes, however if you do not own any commodities, what are you waiting for?