Dollar doldrums bring gold glory

Perception truly is greater than reality – and the world's growing perception is that the dollar has seen better days. The actual strength of the dollar isn't even the question here; the consequence of this mounting world perception is. It's clear, especially over the past six months, that there's been a steady defection from the dollar by nervous foreign investors.

Are these defections deserved? Both the Wall Street Journal and Morgan Stanley recently offered the opinion that the dollar could drop by some 20 percent to 25 percent in the near future, with the Journal adding that such trends "invariably go further, often a good piece further, than you'd expect."

So what happened to our once mighty dollar, our formerly invincible monetary instrument that, prior to 1973, made up over 90 percent of the world's currency reserve (and, at last check, was down to 76 percent and falling). What's changed?

The truth is, there are several intersecting factors affecting the dollar all at once.

There's the introduction of the euro in January, a bona fide competitor to the dollar from a unity of European nations with a greater collective economic might than the U.S. There's the stark reality of a budget deficit that's looking to be in the $150 billion range by year's end (when, just 16 months ago, a $313 billion surplus was projected).

There's our infamous trade deficit that averaged $1 billion a day last year and reached a record 4.4 percent of our Gross Domestic Product, NAFTA and GATT notwithstanding – and that's something that hasn't exactly been inspirational to foreign investors (who must finance it).

Then there's our anemic recovery with its telltale symptoms of recently drooping retail sales, government revenues down 29 percent from April to April and a stock market that's, once again, testing recent lows with strap-yourself-in, triple-digit decline days.

This last point, a flagging Dow, is especially ominous. America's stock market has been a big lure for foreign investors who hold, Morgan Stanley estimates, some $1.5 trillion of our equities. If Wall Street continues sending out spooky signals and the recovery continues to be a non-event, foreign investors could start cashing out of that monstrous sum. A liquidation of just a fraction of that $1.5 trillion would send a tsunami to Wall Street.

As if all those dollar-souring factors aren't enough, there's a very real (and normal) cyclical downturn of our currency just starting. Like any investment, the dollar is subject to cycle and, coming off the "bubble years," charts now show it at the start of a downturn swing.

So, all in all, these are not good days for the dollar. And that, not surprisingly, means good days for gold.

Think about it. The world will always have an unwavering means of exchange. If the dollar is stumbling in that role, investors will waste little time dumping paper for something else. That "something else" now happens to be gold. In fact, with virtually every percentage drop in the dollar, there's been an answering jump in the price of gold.

It's as if people instinctively understand that gold will always be the real money, that whenever there's turbulence in the sea of currency, gold will always be safe harbor. And, make no mistake, there is tremendous turbulence in that sea.

Should the Wall Street Journal and Morgan Stanley's 25 percent fall in the dollar come about soon, expect gold to breach the $500 dollar level. (Every 1 percent drop in the dollar should translate to a 3-4 percent move up in gold.) Get ahead of a falling dollar and start to build a strong gold position in your portfolio. After all, if none of the many other compelling reasons to invest in gold convince you – a softening dollar certainly should.

A lot of controversial economics and politics here. But what does all this mean to the average American? It means that imported goods become more expensive. It also means that our exports are more competitive on the world market. "Strength" is a relative term. A "weak" currency is not necessarily a bad thing.

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