The Signposts of Dollar's Decline

10/25/2010 12:30 pm EST


Peter Way

Founder and CIO, Peter Way Associates

Peter F. Way, editor of Block Traders’ Oil & Gold Monitor, names two mining stocks and one ETF as the likeliest near-term winners from a weaker greenback.

The US dollar has been the principal reserve currency of the world. That is in the process of change.

Like many significant changes, the evolution has been slow and subtle. What has not been subtle is the cause of the change, which is US political policy. On both sides of the aisle there has been the attitude that domestic deficits don’t matter, and all problems can be relieved by printing dollars. The US has gone from a reasonably balanced political “corporation” to being a nation hugely in debt, with no apparent political will to turn back the deficit pattern.

The rest of the world has seen the pattern before, and is eroding its confidence in the soundness of the US dollar and is evaluating the odds that a dollar devaluation is in the offing. That scorecard is being kept by how many dollars it takes to buy an ounce of gold. For all its failings as a currency, gold still is the most universally accepted index of the soundness of all currencies. Here is how the world has been evaluating the US dollar:

—30% more dollars per ounce from a year ago
—60% more dollars per ounce from two years ago (26% per year)
—190% more dollars per ounce from five years ago (23% per year)
—405% more dollars per ounce from 10 years ago (17% per year)
This is not an errant, temporary aberration; it is a serious trend.

Randgold Resources (Nasdaq: GOLD) has strongly rising stock price forecasts behind its market performance. We have recommended GOLD (the stock) as a buy 13 times so far out of 19 letters this year. All but two earned profits, and those losses were only at a 4% level. All 13 buys brought in profits of 105%. With holding periods averaging less than 10 weeks, the annual rate of return was 33%, a bit better than the metal’s rate of price rise. Now the market-maker price range forecasts continue to be appealing. Prior forecasts at this level have been seen over 80 times, with profits earned 19 out of each 20 times. Gains averaging over 14% earned in less than two month periods generated rates of return at a 143% level, encouraging the present buy advice.

The iShares Silver Trust ETF (NYSE: SLV), currently is priced at the lower quarter of [the market makers’] hedging forecast range. This puts [the ETF] into past experiences where 13.5% gains have been achieved on average in holding periods of some 50 days, making annual rates of return of 88%. Out of every 20 such experiences, 19 have closed out at a profit. The shares here rank better than 91% of our entire 2,200-plus population of stocks and ETFs.

Royal Gold (Nasdaq: RGLD) at under $50 a share offers an upside forecast of 10%, and backs it up with a long history (475 days) of forecasts at least as extreme as at present. They averaged profits of 9.5%, earned in less than 50 market days of investment, an annual rate of 63%.

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