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Tuesday, April 12, 2011

What to Do, as Dollar Declines ?

In a SEEKING ALPHA piece, ' 'The Dollar's Decline: Why the Stock Market and Economy Are at Risk'',   the FINANCIAL SENSE blogger has these words of advice and/or wisdom to offer (excerpts only).

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While most investors are familiar with the Dollar Index (UUP), it is actually a poor tool in gauging the strength of the USD given its weightings and only being a six currency basket. To truly see how the greenback is performing on a global scale, one needs to look at more than six currencies and include precious metals (GLD, SLV, PALL, PPLT). When one does this, it is truly amazing how much the purchasing power of the USD has declined since 2009 after two rounds of quantitative easing (QE), and it is this loss of purchasing power that has the potential to at least cause another growth scare like 2010, or even a bear market.

The last time we were in a similar scenario was late 2007 to early 2008. While I am not forecasting another crash like the one seen in late 2008, I do believe we can see the same trends. What were some of the characteristics of that time period? A weak USD, rising inflationary pressures, lower retail sales, lower corporate profit margins, and outperformance by commodities (DBC) in general, and precious metals (GLD, SLV, GDX) in particular.

If the USD accelerates its current decline, then commodity based investments would be the most likely beneficiaries. Additionally, defensive sectors like consumer staples (XLP), health care (XLV), utilities (XLU), and telecommunications (XTL) will likely outperform the more cyclical sectors such as technology (XLK), consumer discretionary (XLY), and financials (XLF).