The science of financial health

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Recently, Federal Reserve Chairman Ben Bernanke has hinted that the U.S. is going to try to strengthen or at least stabilize the weak dollar. So what might happen to the economy with a stronger dollar? And how has the economy been affected by a weak one?
Effects of a weak dollar. The dollar has fallen more than 40% versus the euro, and 26% versus the yen in the last six years.1 Its value has dropped 28% since 2001 compared to other benchmark currencies.2 This devaluation has meant boom times for U.S. corporations and companies that do business overseas, reflected in their earnings reports (and in their stocks on Wall Street). A weak dollar also helps to shrink the U.S. trade deficit, which has slimmed notably in the last couple of years.
On the other hand, a weak dollar breeds inflation and drives up the prices of imported goods. It also helps drive investors to the commodities markets, as they turn to oil, gold and other hard assets for a hedge against inflation. Witness the amazing ascent of oil and gold prices.
Effects of a strong dollar. If the Fed raises interest rates (and some economists feel there may be a rate increase before 2008 ends), that could strengthen the dollar, tame inflationary pressures, and help to weaken oil prices. But it also risks crimping the economy further, given that the housing market has yet to pull out of its slump and that consumer spending is already pinched due to high energy and food prices. The U.S. could also strengthen the greenback by buying dollars in the foreign exchange markets, something that hasn’t happened since 1995.
That was the year the U.S. Treasury adopted a strong dollar policy. Between 1995 and 2001, the dollar gained 29% in value against a basket of other major currencies.2 However, because of that increase in valuation, demand for U.S. exports lessened, and that was a contributing factor to the 2001 recession.
Where are you putting your dollars? Have you considered world currency CDs? Currencies like the Australian dollar, Brazilian real, or South African rand, just to name a few. How is this economy affecting you, and where are you investing your money? A chat with a qualified financial advisor might be eye-opening – an advisor who is independent, and ready to work for your goals. Now is a good time to look ahead and plan for your objectives, with a financial strategy that will help you whether the dollar recovers or falters. Think about that today.
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Loran S. Coffman is a Representative with H. Beck, Inc. and may be reached on the web at www.WPSinvestments.com, by phone (248) 693-5599, or by email advisor@WPSinvestments.com.
See ‘The Science of Financial Health,? Coffman’s exclusive weekly financial column on the web every Wednesday at www.LakeOrionReview.com.
These views are those of the author and should not be construed as investment, tax or legal advice. Past performance is no guarantee of future results. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please consult your Investment, Tax and/or Legal Advisor for further information and advice about application to your specific circumstances. Researched and authored by Loran S. Coffman & Peter Montoya, Incorporated.
Securities offered through H. Beck, Inc. Member FINRA, SIPC. Investment advisory services offered through M.R.Spencer Advisory Services, LLC. WPS-Investments, Inc. is unaffiliated with H. Beck, Inc. Branch address of WPS is 189 W. Clarkston Rd., Bldg. A, Lake Orion, MI 48362.
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Citations
1 fool.com/investing/general/2008/06/05/bernanke-changes-strategy.aspx [6/5/08]
2 marketwatch.com/news/story/makes-economic-slump-different/story.aspx’guid=%7b8F4AB40B-962A-419C-A478-CAB86547EDFB%7d&print=true&dist
=printMidSection [5/19/08]

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What’s behind the jump in gold prices? This fall, gold topped $800 per ounce. We haven’t seen prices that high since 1980.1 You may remember the drivers behind the 1970s bull market in gold: inflation around 15%, worries that OPEC would hold the global economy hostage, and the removal of artificial price controls during the Nixon administration. Today, the factors pushing gold higher are a bit different, but the main reason for gold’s rise is basically the same now as it was then. Investors are anxious about the economy, and in times of high anxiety, some investors turn toward gold.
#1: The credit crisis. The uncertainty that gripped the housing, banking and investment markets this year was a boon for gold. Around the globe, investors watched and worried this year as the U.S. housing slump deepened, fearful that America would fall into a recession and drag other economies down with it. That fear triggered a ‘flight to quality,? in the words of a World Gold Council official,2 and sent demand for gold higher worldwide. As banking and real estate giants announced big losses on Wall Street, American investors also eyed hard assets, gold among them. Soaring crude oil and natural gas prices have also helped ? rising oil and gas prices stir fears about inflation, and that is good for gold.
#2: A weak dollar. In addition to market demand, the soft dollar has also contributed to rising gold values. The dollar repeatedly fell to record lows against the euro and other core currencies this year. The Federal Reserve also cut interest rates three times in 2007. When the Fed cuts rates, it makes the dollar even less attractive to overseas investors, and the falling dollar helps to push up gold prices.
#3: Growing demand that is harder and harder to meet. Demand for gold is growing, especially in Asian investment markets. In fact, India is the world’s top gold consumer.3 It consumed about one-fifth of the world’s gold in 2006, and in 2007, its gold purchasing is on pace to rise 50%.4
However, while demand in emerging-market countries may be high, environmental regulations on gold mining have tightened considerably since the 1970s and made it less convenient and cost-effective. This is yet another reason why commodities analysts are bullish about gold in the future.
If you are thinking about investing in gold, do it carefully. Make sure you talk with a qualified financial advisor who understands the commodities markets.
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Loran S. Coffman is a Representative with H. Beck, Inc. and may be reached on the web at www.WPSinvestments.com, by phone (248) 693-5599, or by email Advior@WPSinvestments.com. See ‘The Science of Financial Health,? Coffman’s exclusive weekly financial column on the web at www.lakeorionreview.com.
These views are those of the author and should not be construed as investment, tax or legal advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please consult your Investment, Tax and/or Legal Advisor for further information and advise about application to your specific circumstances.
Securities offered through H. Beck, Inc. Member FINRA, SIPC. Investment advisory services offered through M.R.Spencer Advisory Services, LLC. WPS-Investments, Inc. is unaffiliated with H. Beck, Inc. Lighthouse 436 S. Broadway, Suite F, Lake Orion, MI 48362
Citations:
1 usnews.com/articles/business/your-money/2007/12/12/whats-driving-the-golden-spike.html
2 reuters.com/article/marketsNews/idUKN1359172520071114’rpc=44
3 ibtimes.com/articles/20070904/gold-commodities.htm
4 biz.yahoo.com/ibd/071130/industry.html?.v=1

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