Wealth Building Lessons

I mentioned in the previous post that I’m bullish on gold and that I think in the long term I think it will go up while the US dollar will depreciate. Generally, gold and the US dollar have a negative correlation, so if the dollar depreciates, gold will definitely go up.

I previously commented on some of the reasons why the dollar will depreciate, but another reason is that globally, less and less people want to hold it. Its a basic law of supply and demand. As the demand for something drops (while at the same time the supply increases) the value (both actual and perceived) for the product drops. In this case, the product is the US dollar.

So is there evidence of the dollar becoming less globally desirable?

I’ve heard anecdotes of how drug smugglers are now doing business in euros instead of dollars. I don’t really know if they’re actually abandoning the dollar or not but its still interesting. Drug smugglers are supposedly cutting edge in terms of finance and are ahead of the pack. What they do, regular businesses supposedly adopt after a lag of a few years.

Iran is also demanding payment of oil in euros instead of dollars. This also reduces the demand for dollars.

Kuwait just announced that it was unpegging its currency from the dollar. This should reduce the demand for the dollar even further.

But it seems everyone is bearish on the dollar right now. And when everyone moves to one side of the trade, the market usually goes against them.

Also, historically Kuwait has been bad at timing the dollar. Back in 2002 when they pegged their currency to the dollar, it was at a trade-adjusted peak. They’ve been watching their currency depreciate for 5 years now.

Now that the dollar is hitting historic lows, Kuwait is bailing on the dollar. This may be a good contrarian indicator. In the long run, even Warren Buffett agrees that there aren’t many reasons to be bullish on the dollar, but in the short run I think the dollar might appreciate a bit. (And in doing so, provide good buying opportunities for gold!).

No one knows whether the dollar will actually start appreciating, but I’m willing to take a chance that it will. Earlier this week, I invested in the Rydex Dynamic Strengthening Fund that offers 200% of the movement of the dollar. Of course, if I wrong, I’ll lose twice as much as the movement of the dollar. But with a tight stop to prevent catastrophic losses, I’m willing to find out whether I’m right.

As I’ve said before, I like looking for uncommon investing opportunites, and as Buffett says “Read everything you can” and then practice it, since the difference between reading and doing is similar to “reading a romance novel and doing something else”!!

I don’t have to make money on every investment, but so long as I learn from my mistakes and make sure they’re small losses, I’ll come out ahead.

Note: This is not a recommendation to make this trade. Its only for informational purposes.

Bookmark / Email This