July 2006

The Incredible Shrinking Dollar
Here's How You Take Cover From the #1 Wealth-Killer

by Michael Checkan, Wealth Protection Advisory Panelist

For the past 35 years, one thing has been true about the U.S. dollar: It's been whittled away to a mere shadow of its former self.

The fact is, the greenback has dropped 70% against most of the major currencies in this time... It's fallen 40% since 2000... and it's already lost an additional 7% year to date - and that's even after its short-lived bear rally in early 2006.

It's no wonder countries like China, South Korea and India, as well as European countries like Russia and Sweden, are diversifying their reserve holdings out of the dollar.

Yet, what it means to the everyday investor is pretty simple: The purchasing power of the dollar has declined rapidly, making every penny you own worth less and less...

Of course, the U.S. dollar weakness has not gone unnoticed. George Soros has invested in foreign currencies for years - and has made millions by betting against the U.S. dollar and other currencies. Warren Buffett - for the first time ever - started investing in foreign currencies four years ago. Analysts estimate that he's already made $2 billion by investing outside the dollar.

But you don't have to be an investment icon to protect and grow your wealth outside the U.S. dollar. You just have to recognize the instability of the dollar and put some wealth protection plans in place.

Let me explain how...

The Best Currencies for Protection

There are almost 200 currencies in the world. But not all of them will protect you; some are even weaker than the dollar. In fact, some "gold bugs" even suggest that no "fiat" currency (one not backed by gold) will protect you, and you're better off holding all your assets in gold. To be honest, I'm not an extremist - but I'm not a "paper worm" either.

But I do believe in a smart diversification of assets into dollars, foreign currencies and gold. Here are the best options going today:

U.S. Dollar: Clearly, if you're living in the U.S., you must have dollars. But you don't need to have 100 % of your assets denominated in the shrinking dollar. Some financial planners suggest that you keep 50% of assets denominated in dollars and the other 50% in foreign currencies and gold. (The Oxford Club recommends 30% in foreign stocks and 5% in precious metals.) The point is simply to have some protection against the shrinking greenback.

Euro: The euro came into existence in 1999, and this electronic currency became a physical currency only in January 2002. Today, most of the countries of Europe use the euro as their national currency. The euro is fast becoming the second reserve currency of the world.

Swiss Franc: This currency, like the euro, should be a "core" holding. The Swiss franc has outperformed and has been the strongest currency in the world against the U.S. dollar during the past 35 years. My gold bug friends say this is the case because it has a greater gold backing than the dollar. By the way, the euro has a greater gold backing than the dollar, too. I think the Swiss franc's strength has more to do with Switzerland's political, social and economic stability.

Commodity Currencies: Specifically, I like the Canadian dollar, the Australian dollar and the Norwegian kroner. All are blessed with natural resources, whether it be base or precious metals and oil and gas. This is the "Decade for Commodities," and the exports of many of these countries have already tripled in value. The future need for commodities from the developing and developed world is enormous. Therefore, the future outlook for these currencies looks very bright.

Gold: This is the only "real money" in the world today.  It's the ultimate means of exchange and store of value, having been used as money for more than 2,000 years. Gold is not backed by debt like the "fiat" monies of the world. Historically, the longest-lasting paper money survived only about 200 years. Unlike gold, no paper money has passed the test of time. Central banks use gold as a reserve currency along with their holdings of dollars, euros, etc.

Why Overseas Deposit Accounts?

History has proven that you should not hold all your assets in one currency, one country, or one investment. Your U.S. dollar holdings should be held in the U.S., but your foreign currency holdings should be held outside the country. Let me explain why...

I began my career in the foreign currency business 40 years ago. At that time, more than 50% of the countries of the world had some type of foreign exchange controls. This meant that most governments would not permit the free flow of money in or out of the country. For instance, citizens could not invest or take local currency abroad - even to travel - except in nominal amounts.

Today, most of the countries of the world permit the free flow of monies. Although in some cases, these changes are quite recent. For example, in the United Kingdom prior to Margaret Thatcher, a British citizen could only leave the country with the equivalent of about $100.

In the U.S., prior to 1977, the president could impose emergency powers only in wartime. After 1977, the president can impose emergency powers to deal with any unusual and extraordinary threat outside the U.S. In effect, this gives the president executive control over the entire U.S. economy, shutting down entire sectors at the stroke of a pen.

There is a possibility of foreign exchange controls in the U.S. due to a "National Economic Emergency." This could mean restrictions on converting U.S. dollars to other currencies, restrictions on investments abroad, and restrictions on international travel. Therefore, holding assets outside the U.S. is a necessity.

The first place that comes to most investors' minds is Switzerland. The Swiss, either directly or indirectly, hold about one-third of the world's offshore wealth.

Europe is the place, but Switzerland may not be the country for you. There are lower-profile countries that offer "Swiss-like" universal banking. Austria, Denmark, Jersey, Liechtenstein or Luxembourg, for example. Most importantly, you should feel comfortable with your banker, asset manager or insurance provider.

There are a few other factors to consider from your European partner. The partner should be accessible with good communication and provide all the financial services you need. The icing on the cake would be a nice place to visit your money.

So, What Do You Do?

Most investors don't know that they can protect their purchasing power by internationalizing their self-directed retirement funds. Your local stock or insurance broker won't tell you this, since it would eliminate their commissions.

In the U.S., you can only have insurance policies denominated in U.S. dollars. Abroad, you can have policies in dollars, Swiss francs, euros, British pounds, etc. In the U.S., you can only invest in approved securities. Abroad, you can invest in most securities anywhere in the world.

Wealth Protection Panelist Michael Checkan is President of Asset Strategies International, Inc. (www.assetstrategies.com), based in Rockville, MD, specializing in the areas of precious metals, foreign currencies and overseas wealth protection. For more information, contact Michael at 800.831.0007 or e-mail him at assetsi@assetstrategies.com

1. The Massive Trade Deficit. The U.S. trade deficit now exceeds $800 billion - and it's growing. U.S. consumers continue to buy merchandise from abroad, while paying in diminishing dollars. Some experts say that the dollar must drop 30% or more based on this alone. The U.S. dollar is overvalued while one of our biggest trading partners, China, is keeping its currency about 30% to 40% undervalued.
2. The Massive Budget Deficits. The U.S. is the world's largest debtor nation. The Bush administration has spent more than all administrations combined from 1776 to 1980. It's in debt by more than $8 billion, with unfunded liabilities of about $50 trillion. The debt is growing at $2.5 billion per day. Debt does matter, and there will be a price to pay for these excesses.
3. The Endless War. There are many similarities between the "guns and butter" policies of the 1970s and the current administration's present-day policies. As it applies to war, there was the Vietnam War in the 1970s. Today, there are endless wars in Afghanistan and Iraq, with American troops stationed in 100 other countries throughout the world. When these wars turn into nation building, even more U.S. treasures are sucked away.
4. Money Creation and Inflation. The Federal Reserve has been significantly increasing the money supply during the past five years, due to its concern about deflation. The Chinese buy our debt with dollars we owe them for their goods. They have been keeping these excess dollars out of circulation as reserves, thus decreasing the potential for rising prices in the U.S. But this is beginning to change.
5. Reserve Currency of the World. The U.S. dollar has had the benefit of being the reserve currency of the world. But this is changing, too. More and more Central Banks are diversifying their reserves from dollars to include euros, yen and gold. For example, China has diversified into a basket of currencies and gold. OC

Reprinted with the permission of The Oxford Club

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