Weekly Commentary
October 18, 2010
The Markets
When is a dollar not worth a dollar?
A McDonald's Big Mac costs an average of $3.71 in the United States, according to an October 14 article from The Economist. Just across the border in Canada, that same burger costs $4.18 based on the October 13 exchange rate. In the Euro area, you'd have to shell out $4.79 to quench your Mac attack. But, if you're really hungry, you should forget going to Switzerland because a Big Mac there will set you back a whopping $6.78 at the going exchange rate.
So, a dollar is not worth a dollar when its value declines relative to another country's currency such as the ones above. The dollar is also weak against the Japanese yen, where it fell to a 15-year low last week, and the Australian dollar, where it fell to a nearly 30-year low, according to MarketWatch.
What's going on here?
Essentially, the combination of economic weakness in the U.S., extremely low interest rates, and our country's easy money policy, have conspired to reduce the value of our currency relative to some other countries. And, as our government knows, a weak currency can be a net positive -- as long as it doesn't get too weak.
According to an October 1 weekly update from Linda Duessel at Federated Investors, "Currency depreciation is the most politically palatable way to deal with both deficits and slow growth. Unfortunately, history suggests depreciating the dollar is the worst possible way to deal with public debt. It spawns inflation, stifles growth and eats away at earnings."
The relatively weak value of the dollar may not crimp your day-to-day lifestyle right now. However, as an advisor, it's an important macro indicator that could impact the value of your portfolio -- and your pocketbook -- if it gets too far outside of historical norms. It bears watching.
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Data as of 10/15/10
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1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500 (Domestic Stocks)
|
1.0%
|
5.5%
|
8.1%
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-8.8%
|
-0.2%
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-1.5%
|
|
DJ Global ex US (Foreign Stocks)
|
1.3
|
7.5
|
6.6
|
-9.0
|
3.8
|
3.2
|
|
10-year Treasury Note (Yield Only)
|
2.6
|
N/A
|
3.5
|
4.7
|
4.5
|
5.7
|
|
Gold (per ounce)
|
1.9
|
23.9
|
29.8
|
21.7
|
23.6
|
17.5
|
|
DJ-UBS Commodity Index
|
0.9
|
4.7
|
9.3
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-6.6
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-3.9
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3.0
|
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DJ Equity All REIT TR Index
|
1.4
|
24.0
|
34.1
|
-5.1
|
4.0
|
11.5
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Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.
WHILE THE PURCHASING POWER OF THE DOLLAR can be analyzed using a Big Mac, it can also be analyzed using something less edible -- gold. Gold has been considered a medium of exchange for several thousand years, according to the National Mining Association. And, for some people, it is the soundest "currency" in existence today because it is scarce, it can't be printed (mined) freely, and it has a long history of being valuable and tradable.
Measuring the value of the dollar in terms of gold is quite simple. All you do is plot the dollar cost of one ounce of gold over time. Back in the early 1930s when our country was on the gold standard, gold was set at a fixed price of $20.67 per ounce, according to The Economist. In the early 1970s, the last vestiges of the gold standard were removed and the price of gold was allowed to reach a "market" price. As of last week, that market price was over $1,300 per ounce.
The rise of gold from $20 an ounce to over $1,300 an ounce was effectively a massive devaluation of the dollar, according to The Economist. Had you bought an ounce of gold in 1930 for $20 and held it to today, you could sell it for more than $1,300. Had you just sat on your $20, it would still be worth $20, but it would buy you less than 1/50th of an ounce of gold.
The funny thing about gold is that it's not an "investment" in the traditional sense because it does not pay a dividend and it does not generate cash flow. It just sits there and looks really pretty. However, given that its price in dollar terms has risen dramatically over the past 80 years, it's clear that people do place a value on it.
Weekly Focus - Think About It
"More gold has been mined from the thoughts of men than has been taken from the earth."
--Napoleon Hill
