The Best Asset to Own as America’s Power Fades

On Wednesday, I wrote about the end of the “Age of America.”

This isn’t some wishy-washy notion about the end of the American Dream…or some nostalgic idea about “things not being like they used to be.”

No – the end of the Age of America is a concrete forecast by the IMF about when China will overtake the U.S. economy. According to the IMF, this will happen in 2016 – just five years from now.

This forecast is on a “purchasing power parity basis,” which takes into account the exchange rate difference between the Chinese yuan and the U.S. dollar. In dollar terms, in other words, the U.S. will still have the larger economy.

But the details are less important than the megatrend they represent: China and other emerging markets are in the ascendency. America’s “top dog” economic status in world is coming unstuck.

In other words, China and the emerging markets are climbing toward the summit of economic power just as America is peaking that summit and starting the long journey down from the heights of economic dominance.

This affects you, like it or not. Because it means living standards will change. As will investment returns in U.S. stocks and bonds.

Of course, this is not just a story of slowing growth in U.S. It is also a story of new growth in the world outside America. This means there’s never been a better time to be an overseas investor.

Next week, I’ll be outlining ways we can profit from this megatrend. But first I want to take a closer look at the problems facing America. And how you can protect your portfolio.

One problem America now faces is its reliance on money creation to spur growth. This was evident on Wednesday during Fed chairman Ben Bernanke’s press conference.

Bernanke stayed committed to his program of creating a total of $600 billion and using this money to buy U.S. government bonds. He also stayed committed to keeping the fed-funds rate – the rate banks charge each other for overnight loans – at between 0.0% and 0.25%.

The result? The U.S. dollar is getting crushed relative to six other major trading partner currencies: the euro, the British pound, the Canadian dollar, the Swiss franc, the Japanese yen and the Swedish krona.

This is measured by something called the U.S. Dollar Index. The higher the value of this index the stronger the dollar is in global terms. The lower the value of this index goes the weaker the dollar is in global terms.

Put another way, the higher the value of the U.S. Dollar Index, the more your dollar buys you overseas and vice versa.

From 1971 to 2011, the value of the U.S. Dollar Index averaged 98.79. It reached a historic high of 164.72 in February 1985 (the perfect time to take an overseas vacation). And it reached a low of 71.33 in April 2008, months before the stock market crash of that year.

As you can see from the chart below, the U.S. Dollar Index is heading back down towards it 2008 low.

Meanwhile, gold – what I call the ultimate “anti dollar” currency because of the way it offsets lows in the buck – is selling for $1,534/oz.

And gold isn’t the only commodity on the rise. Much more important to most Americans is the price of gasoline.

According to analysts, every $0.01 increase in the price of gasoline drains $1 billion in consumer spending out of the economy. Which is why the chart of unleaded gasoline below is so worrying. As you can see, it’s moving in almost perfect symmetry against the dollar.

According to AAA’s daily tally posted online yesterday, the average cost of a gallon of gasoline rose to $3.886, up from $2.869 a year ago. That’s a $1.01 rise – or a $101 billion drag on the U.S. economy.

Under these conditions, it makes sense to diversify out of the U.S. dollar and to buy into hard assets that rise when the dollar falls.

The single best way to do this is to put a portion of your savings into gold – the best “anti dollar” currency there is.

My favorite way to own gold is through an exchange-traded fund called the ETFs Gold Trust (NYSE:SGOL). This holds purely physical gold, which is stored in Swiss vaults. And its expense ratio – the fees the fund charges investors – is just 0.39%.

Since I first recommended readers buy SGOL last October, this ETF is up by 13.6%. So while the dollar has tanked, SGOL has risen.

SGOL remains a buy as long as America continues to sacrifice the dollar in search of growth.


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