American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

Dec. 2004 – The Tallest Dwarf Revisited

In September 1997 our parent, the American Institute for Economic Research (AIER), in its Research Reports, assessed the state of the world’s fiat currencies at the time and observed that the dollar then stood as “The World’s Tallest Dwarf.” The dollar’s claim to that title is now in question. Following its inception in 1999 the euro quickly lost ground against the dollar, but the trend has since reversed. The dollar price of the euro now stands 46% above its level four years ago. Pundits have attributed the dollar’s decline to a host of factors, chiefly the U.S. current-account and fiscal deficits. As usual many headlines trumpeting the dollar’s demise appear to be merely “piling on” by suggesting a simple extension of this latest trend.

But pondering the relative values of fiat currencies misses the larger point of AIER’s article, which remains valid and is far more important to investors. Since the collapse of the Bretton Woods fixed exchange rate system, all fiat currencies have suffered great losses in purchasing power, and history makes clear that all such currencies have ultimately failed as effective purchasing media. It has gone largely unmentioned that the purchasing power of both the euro and the dollar have fallen, by 11.9% and 14.0%, respectively, since the euro was launched.

Investors should not be distracted by this race to the bottom, but instead stick to our recommended portfolio allocations. These include gold, which over very long periods has retained its purchasing power and is largely uncorrelated with our other asset classes. Foreign equities are also among our holdings. Their values rise, ceteris paribus, in dollar terms, during periods when the dollar is falling relative to local currencies. U.S. stocks are also indispensable to our approach for they have significantly outpaced price inflation over long periods.

During the 1990s investors who had the discipline to maintain a portfolio comprised of these asset classes could have, through periodic rebalancing, been slowly but steadily selling U.S. stocks amidst a soaring stock market, and reinvesting in gold and foreign stocks well before their recent price surge. Most recently, mechanical rebalancing would call for the reverse; indeed, for clients in our Professional Asset Management program, we have been taking gains in gold and foreign stocks to reinvest in asset classes whose prices have been relatively weak.

Also in This Issue:

Beware of the Alternative Minimum Tax
Saving for College and Financial Aid: Don’t Shoot Yourself in The Foot
Gold Fields LTD.: The Quest Continues
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield