Double Your Dollars from the Dollar’s Demise

The combination of liquidity circulating through the U. S. economy and a tanking dollar stokes inflation. Investors are increasingly sensing inflation as a threat and seeking a safe-haven in gold.

The U. S. government has responded to the worst financial crisis since the great depression with a massive, more than $13.5 trillion in pledged or potential outlays. Meanwhile, rising unemployment and slumping corporate profits are crimping the U. S. Treasury’s tax revenue.

The credit worthiness of the U. S. government is raising concern and its AAA credit rating is something that cannot be taken for granted. Against this backdrop, it is hardly a surprise that the appetite of foreign governments and investors for dollar-denominated investments has diminished.

The dollar’s standing as the world’s de facto reserve currency is impaired. Nations like China are actively looking to diversify their foreign exchange reserves away from the dollar and showing a liking for gold. The combination of liquidity circulating through the U. S. economy and a tanking dollar stokes inflation. And, investors are increasingly sensing inflation as a threat and seeking a safe-haven in gold.

Gold Price Outlook

Gold is once again approaching the psychologically important $1,000 per ounce mark. Rallies in the price of gold have peaked in the $900-1,000 per ounce range three times since the start of 2008. I believe gold will crack the four-figure mark in 2009 and move on to exceed its 2008 highs. Given the state of the U. S. economy and the monumental challenges ahead, the $1,000 per ounce figure can well become a support or floor for a long time to come.

Investment Recommendations

Here are three ways for conservative and moderately risk-tolerant investors to gain exposure to gold.

1. Own shares in SDPR Gold (GLD).

2. Own shares in mutual funds or ETFs like Fidelity Select Gold (FSAGX), USAA Precious Metals and Minerals (USAGX) or Market Vectors Gold Miners ETF (GDX).

3. Own shares of relatively well-capitalized gold miners with growing earnings. Newmont Mining (NEM) fits quite well in this regard. The company possesses a strong balance sheet. Newmont’s operating margin stands to widen this year as production from its Boddington mine in Australia starts in mid-2009.

Sam Subramanian PhD, MBA edits the AlphaProfit Sector Investors’ Newsletter, ten times winner of Hulbert Financial’s #1 rank. The investment newsletter offers recommendations on Fidelity funds and sectors ETFs.