With the Chinese yuan and
Brazilian reals off-limits to most retail investors, turning to gold may be
the best bet. Even with the gold hitting the $1,400 an ounce mark, it's still
a good idea to allocate around 20% of your portfolio to this precious metal.
Consider that over the last decade, gold is up by 17%. Compare this to stocks
over the same period and you'll see the difference. Stocks were up by only
1%.
In today's economic climate, gold can
serve as a hedge against a weakening dollar. Also, unlike other commodities
like wood, wheat, and aluminum that are lumped with gold, you can easily
convert this precious metal into cash. Its growing popularity around the
world also makes it a safe bet over the short and medium term. China, which
is the world's biggest producer of gold, is quietly buying up more of it.
The Chinese emerging middle class are
also quietly acquiring their own stash of gold. India's middle class is doing
the same thing. But the latter is more into buying gold jewelry than
bullions.
Dollar Set to Get Weaker, But to What End?
A weak currency would traditionally
help a country improve its exports, thereby creating more investments and
jobs. However, in the case of the United States today, a weak dollar won't
necessary make much of a difference. It will help the export industry to a
certain degree but not to the extent it did in the past - mainly because of
how American multinational firms are operating.
Determining the impact of a weak dollar
is important. If it isn't as useful as policymakers hoped it would, then the
United States might be getting criticisms left and right for (monetary easing
announced this month) without deriving actual benefits from it. A depressed
dollar provides American exporters with an advantage; it should also ideally
improve the unemployment rate which is stubbornly at 9.6%.
Both President Obama and Treasury
Secretary Tim Geithner emphasized that monetary easing is designed to help
American businesses invest, grow, and borrow rather than a move that's
intended to lower the dollar. A lower dollar is just among its effects. Even
if the Fed's decision does weaken the currency, however, America's jobless
may not reap the benefits.
Job Creation is Not a Sure Thing
The real issue may lie on how most
American companies are structured. Large US firms from General Electric to
Ford often manufacturing products in the countries where they will be sold,
rather than exporting them abroad. Since companies are effectively using only
one currency in this process, this takes the dollar out of the equation.
And for companies that still
manufacture in the United States, majority of them source components from
abroad. The weaker dollar is thus offset by the higher cost of sourcing
supplies. In addition, even if a company receives a boost in foreign sales,
it may not result to employment. It is important to note that a large chunk
of American exports are manufactured products, which are not labor-intensive.
Martin Regalia, the chief economist of
the United States Chamber of Commerce says it clearly, "There are very
few corporations that would see this just one way...it cuts across a whole bunch
of lines". Overall, the effect on net export will be positive.
Profitability for companies won't
easily become a driver for job creation. A lot of firms that are currently
manufacturing in the US are usually too small to justify setting up an
overseas facility. Having a weak dollar will help but it won't prompt them to
hire especially if economic outlook remains unclear. Daniel Meckstroth, the
chief economist of Manufacturers Alliance further says that, "you can
replace people with machines."
Data from the past are not very
encouraging. The dollar has fallen by 31% against major currencies since
2001. Yet, Nigel Gault of HIS Global Insight said that manufacturing
employment actually went down from 16.4 million to 11.7 million - this is
despite the fact that exports actually grew by 45%. Since June 2010, the
dollar has already fallen 10% against a basket of major currencies and
exports are up 0.3% in September, the highest level in two years.
The long-term USD chart (courtesy of http://stockcharts.com) above shows that the index
values reached the lower part of our target eclipse. It is relatively safe to
say that betting on the USD at this point would no longer yield significant
profits. In the chart above, note that the USD is not yet close to the next
cyclical turning point so it will trade more or less on the 80 level before
declining again - still, we wouldn't bet on its gains in the near future as
the risk/reward ratio doesn't appear favorable here.
Gary Hafbauer from the Peterson
Institute for International Economics expects the dollar to fall another 10%
in the next few months. This would result to an estimated $100 billion in
American experts over the next two years - translating to about 500,000. The
number isn't bad but it is hardly enough to create an impact because 15
million people are still without work.
The dollar has indeed been driven down.
However, the Fed's decision to inject $600 billion into the economy is not
likely to result to steep devaluation because most of the weakening already
occurred prior to the announcement.
Now let's turn to gold. The price of
gold went back to around $1,350 an ounce on Thursday even as the dollar
continued to decline. Silver
prices rose by nearly 4%, reaching $26.60 an ounce.
In the very long-term chart this week,
we see that gold has not moved above the upper border of the very long-term
trading channel. As we have stated in previous essays, this is an important resistance level.
It was likely that some consolidation will be seen in the near-term so this
should not be of any great concern as it is quite a natural phenomenon.
The important point is that our next
target level, after moving above the trading channel will be close to $1,600.
This target has been arrived at by utilizing two important technical tools.
One is the upper border of the accelerated trading channel and the second is
extrapolation made my applying the 1.618 phi (φ)
number. Both tools indicate a likely move to the $1,600 level perhaps in the
first quarter of 2011. Please note that the full version of this essay
includes also short-term details.
Trade Imbalance
Experience dictates that the trade
imbalance, which we talked about in a previous article, between surplus and deficit countries
won't easily be solved by currency movements in itself.
This was already apparent in the 1980s;
the weakening dollar couldn't solve United State's deficit with Japan. The
same can be said when you look at another trading partner, Britain. Roger
Sustar, the president of Fredon Corporation which is a maker of components in
the defense, aerospace, and medical industries, said that even as the dollar
weakened against the pound, their company didn't see an increase in sales.
Rather, the company received a deluge of requests from clients asking them to
lower their prices.
Despite the challenges, there are still
a number of economists who are hopeful that a sustained weakness of the
dollar will have a positive effect on US employment. Increase in exports, if
continual, would have a multiplier effect on the economy. Steve Blitz from
ITG Investment Research said that the country should rely more on the export
industry to improve employment outlook rather than relying on US consumers
(which currently accounts for 60% of national economic activity). He added
that, "the model of the last 30 years can no longer continue...the job
creation has to come from the export sector."
Foreign investment into the US can also
generate jobs. For example, BMW has set up several facilities in the country
to avoid getting hit by currency fluctuations. The government can encourage
more multinational companies to set up their facilities within the country by
offering special advances. Currency movements are just one part of the
system.
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Thank you for reading.
Rosanne Lim
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