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Friday, December 19, 2008

There is talk that the USD may be devalued

Anonymous Anonymous said...

There is talk that the USD may be devalued. I am wondering what folks think will happen with retirement accounts if that happens and how one can protect oneself. Would you, for example, cash out from UC and use the money to buy gold? Please respond if you have an informed opinion gained either through knowldege of economics or from reading informed commentary. Links to good articles would also be appreciated.

December 19, 2008 7:29 AM


Anonymous said...

The US dollar does not have a fixed valuation relative to the world's other major currencies. In that sense it can (and does) get re-valued, down or up, on any given day. It was recently regaining ground relative to the euro, but with interest rates near zero, some of its value will be lost as foreign demand for dollars declines.

Anonymous said...

Just look at some of the headlines this weekend...

* World faces "total" financial meltdown: Bank of Spain chief

* IMF chief warns 2009 may be 'even darker'

The US is probably headed for a minor depression in '09 and you can't discount the chances of another Great Depression. It is not going to be the typical recession. The whole financial system is in a very precarious state and there are no magic solutions. The extent of the financial damage will become more clear to the public as we approach the Spring or Summer months of '09. This country has an "Oh, sh*t!" moment coming as the public finally grasps just how bad things have really become and they understand that the worst part may still be ahead of us.

If the dollar continues to sink then you will see a rise in the price of gold. I would advise almost all investors to have at least a small portion of their assets in the yellow metal, say around 5% to 10%. Consider it an insurance policy. The easiest way to buy gold is through the gold ETF - "GLD". You can buy and sell it just like a stock.

You can also buy the gold mining stocks, but this is a more leveraged play so don't go too heavy on them and stick only with the major players (Freeport McMoran, Yamana Gold, etc.) and not the speculative junior mining stocks which have to use the credit markets for capital equipment costs.

You will also see many commodities rise as the dollar falls because the price of many commodities is tied to the dollar. Oil is a good example of this relationship. In fact, I would strongly advise investors to load up on the major oils (Exxon, Chevron, etc) on any dips. The big oil companies have almost no debt and lots of cash on hand to ride out bad times. They can get through the fluctuations in oil prices and have the means to make money at both ends of the spectrum (refining profits when oil prices head down and increased valuations when their proven oil reservoirs in the ground go up in value). Beware of small oil exploration companies and all of the oil service companies. They will get screwed to the wall with debt problems and poor earnings if oil stays down at the $45 per barrel level for any length of time.

Here is another very important trick to help you get through hard times. Even though the dollar may fall, be sure to keep at least some investment cash on hand for future bargains, say 20%. Many people bought stocks way too soon during the early dips of the 30's and keep watching their stocks go down, down, down until 1933. It was a long hard slog. However, if you had waited until the end and had at least some cash on hand to buy during the period of 1933-34 you would have seen an amazing 300% return by around 1936! The uptrend in stocks during 1933-34 was slow, so you didn't have to be an expert in timing the bottom to get in at a good price. Any buys you made during 1933-34 would have helped make up for the huge losses you suffered during 1929-1932.

Cash calms you down. Make sure to have at least some cash on hand in case the markets crash all the way down to a level of 60% to 80% off the '07 peak. Don't worry about dollar de-valuation in your cash accounts. Raise the money by cutting your spending levels and putting the cash savings into super low risks investments (CDs, money markets, ultra-safe bonds).

Remember that in the period from 1929 to 1933, the markets crashed by almost 90%! I doubt we'll see a market that is this bad, but don't kid yourself. It can happen again.

As you can imagine, upside potentials can be extreme at the historically low points in stock markets. One rule of thumb I've heard is that stocks aren't truly cheap in a bear market until the forward price earnings (PE) is around 6 and the dividend is at least 6%. Many people are going to be suckered into the bear market rallies that occur in the next few months. Again, remember to keep some cash on hand. If you miss the ultimate market lows, at least you'll have the cash to spend.

If the US enters a long depression it may not be a bad idea to own a mix of large-cap/low-debt/high-div stocks (but no financials!), certain types of commodities (ie, precious metals) and certain commercial AAA to AA rated bonds (again, no financials!). I would be careful with Muni bonds because it looks like a lot of cities may be headed for bankruptcy in the next few years. With low company profits and depressed real estate prices, most cities are not going to be seeing much in the way of taxes coming into the city coffers.

Good luck on your investing and remember the single most important rule of investing -- STAY DIVERSIFIED!!! Many rich people who placed all their money with Madoff Investments learned this lesson last week. Don't be like them. And, as I've already mentioned many times over, keep some cash on hand. De-valuation of the dollar may be the least of your concerns over the next few years.

Anonymous said...

I keep hearing if Obama prints more money the dollar will be worth .27 cents. That means commodities should go up by a factor of four. Gee, milk will be $12 a gallon, gas will be $8 a gallon. Just where are we going with this and how does that make things better.

Anonymous said...

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