What the Crashing Dollar Means for You

We've been here before, Fools, but each successive moment of truth for the U.S. dollar carries greater implications than the time before.

The U.S. dollar index, a broad measure of the greenback's value against foreign currencies, broke down below the 80-mark again Friday. When that level was last breached in December 2008 after a Fed rate-cut, precious metals like gold and silver surged in value … much as they have again recently. Gold has risen more than $100 from its April lows, while silver is set to post its largest monthly gain in 22 years. Oil, too, can find significant strength amid dollar weakness, and shares of foreign oil producers like CNOOC (NYSE: CEO  ) and Petrobras (NYSE: PBR  ) have surged accordingly.

For those who pay attention to the dollar, the long-awaited return of shares like Yamana Gold (NYSE: AUY  ) or Silver Wheaton (NYSE: SLW  ) to double-digit territory may come as no surprise. Silver Wheaton has now more than quadrupled from its 52-week low of $2.51, coinciding with a faltering USD rally and increasing concerns over the currency's longer-term outlook. With added strength from major gold producers like Newmont Mining (NYSE: NEM  ) and Goldcorp (NYSE: GG  ) , this Fool's silverminer CAPS portfolio has surged into the top 200 with 95% accuracy. Interestingly, it was precisely a counter-intuitive spike in the USDX that prompted the creation of that portfolio.

From a fundamental perspective, the dollar is key to understanding the precious metals market. Although short-term aberrations can occur, precious metals and the dollar exhibit an inverse correlation over the long term.

What's so important about the 80-mark on the USDX? Examining a very long-term chart, you'll find that the index flirted with that level several times since its inception in 1973 … without breaking lower. When such long-term support breaks down as it did last year (the USDX plummeted to below 71 in March 2008 before rallying to near 90 a year later), it's any Fool's guess where the next level of support awaits. If we spend any significant time here, then I suggest a re-test of that March 2008 low is inevitable. Based upon the fundamental picture, however, I believe it's inevitable anyway.

Since December 2008, when we last touched this level, the scale of the fiscal response to the financial crisis leapt from $8.6 trillion to more than $13 trillion, quantitative easing was unleashed, and foreign holders of dollar-denominated debt have grown increasingly concerned. Guided by fundamentals, this Fool remains defensively positioned against further dollar weakness.

Further Foolishness:

Thankfully, one need not convert out of the currency to find some protection from a falling dollar. The Motley Fool Global Gains newsletter team is constantly scouring the globe to identify terrific investment opportunities for Fools who wish to diversify out of the domestic markets, and they're ready to share their findings with you.

Petroleo Brasileiro is a Motley Fool Income Investor selection. CNOOC is a Motley Fool Global Gains recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Christopher Barker captains yachts and writes about stocks. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of CNOOC, Silver Wheaton, and Yamana Gold. The Motley Fool has a disclosure policy.


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  • Report this Comment On May 29, 2009, at 5:07 PM, Yourdeadmeat69 wrote:

    GG just got another upgrade, target $53, and Silver Wheaton (SLW) to $13, but you can't just look at the price of gold. GG is the premier gold company with the lowest cost of getting gold out of the ground in the industry--about $175 EXCLUDING the Dec '06 acquisition of GLG assets, which admittedly looked like GG paid too much, with breakeven at $650 an ounce. We are way over that acquisition and the number of ounces of gold produced will triple in three years. The company has $75 written all over it by 2013 in my mumbling opinion.

    SLW is a royalty company, paying $3.95-$4.00 an ounce in perpetuity from mines it helps finance. There's no more than a dozen folks in that firm, they get the money cheaply to invest, they supply it for a piece of the action, much like the saloon keeper in that cable TV series "Deadwood". I just wish they had the dancing girls, but I'll settle for the dual use of the commodity silver as both currency and industrial metal, a double whammy in an improving but potentially inflationary environment. What's not to love?

    GG was $52 the last time we hit gold $9.50, and SLW just lags behind the price of silver at parity--and silver is now $15 an ounce. Do the math.

    These are not for the meek and mild, these are investments for your counterweight to all the "stimulus" the government can print, coming to a price of bread and milk near you. Think of them as the ultimate TIPS.

    They should be a part of everyone's portfolio.

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