The US Dollar - An Investor's Primer
By Gus Krafve
November 6th, 2009
The U.S. dollar was created and defined by the Coinage Act of 1792. The first dollar coins were issued by the United States Mint which was established in 1792. It specified a “dollar” to be between 371 and 416 grains (27 g) of silver (depending on purity) and an “eagle” to be between 247 and 270 grains (17 g) of gold (again depending on purity). At that point in time, one ounce of gold was worth approximately 15 ounces of silver.
The Gold Standard Act of 1900 abandoned the bimetallic standard and defined the dollar as 23.22 grains (1.505 g) of gold, equivalent to setting the price of 1 troy ounce of gold at $20.67. Gold coins were confiscated in 1933 and the gold standard was changed to 13.71 grains (0.888 g), equivalent to setting the price of 1 troy ounce of gold at $35. This standard persisted until 1968. Between 1968 and 1975, a variety of pegs to gold were put in place. The price was at $42.22 per ounce before August 15, 1971, after which the U.S. dollar freely floated on currency markets. Silver coins continued to be issued for circulation until 1964, when all silver was removed from dimes and quarters.
Once the dollar was allowed to freely float versus gold, its value was diminished at a more dramatic rate while the value of gold began to rise significantly. From 1970-1980, the purchasing power of the dollar declined by over 50% while the value of gold rose to $850 per ounce. Since 1980, the purchasing power of the dollar has declined about 62%. The price of gold declined for several years, bottoming out in 1999 at $253; since then, its value has risen steadily and is currently $1059 per ounce.
Another trend that is a bit more concerning is the decline in the US dollar versus other currencies. Since 2002, the dollar has declined about 36% versus a basket of other world currencies. Assuming this trend persists, we have been analyzing the types of investments that have historically performed better in periods of a declining dollar.
Weak Dollar Domestic Equity Plays:
Companies with Substantial Multinational exposure
Materials – Diversified Metals and Gold Mining
Energy - Oil and Gas
Technology
Weak Dollar Foreign Plays:
Owning Stocks in Resource Rich Countries
Emerging Markets
Foreign Bonds Denominated in Non-US Dollars
Over longer periods of time, stocks and bonds have more than kept up with the declining purchasing power of the dollar. While no one can be sure the direction of the dollar versus other currencies, having a well-diversified portfolio will benefit investors during periods when the dollar loses value to other currencies.
