ct the euro to become the currency of international trade within 10 years. It will surpass the dollar by 2015.”

• November 15/06 – Volker says investors will ease on dollar holdings: From Bloomberg: “Robert E. Rubin…and former Federal Reserve Chairman Paul Volcker said foreign investors probably won’t keep increasing dollar holdings… Volcker said the U.S. borrowing requirements raise the risk of a ‘crisis’ in the dollar as soon as the next two and a half years. ‘It seems almost inconceivable that this will continue indefinitely,’ Rubin…said…”

In addition to the above, we recently had Australian Treasurer Peter Costello call on East Asia’s central bankers to “telegraph” their intentions to diversify out of American investments and ensure an

We thought that it would be a good time to review what is happening to the US dollar. To us the biggest problem for the dollar is the amount of the US trade deficit. For 2006 we will see this deficit top out at about $700 billion.

The real problem with a deficit this size is that that the dollars are no longer in the US and held buy Americans. What it means is that the US has bought $700 billion more of goods than it has sold, resulting in those dollars being held overseas. Once these dollars have changed hands, the holders of them are free to do with them what they please. If they decide to re-invest them into the US, either through the stock market (which has been happening until recently) or in keeping the money in US accounts to gain interest, then there is no negative effect because the dollars stay in the US.

The problem starts when these holders of US dollars decide that they do not want to keep US dollars and prefer to buy or invest into something else, such as exchanging the dollars for euros or some other currency, or gold. As more and more holders of the US dollar decide to reduce their US dollar holdings and invest them into other currencies, the result is a reduction of liquidity in the US.

While there is a great deal of US dollars being held by foreign investors, the biggest holders are foreign central banks. It is these central banks that we believe will start to reduce their holdings of the US dollar to diversify away from one main foreign reserve holding. And we believe that this move away from the US dollar has already begun. Many of these banks have been sending out the word that this is exactly their intention. It is a real juggling act because no country wants to the dollar collapse, especially since most of the central banks still hold a huge percentage of their foreign reserve in the US dollar.

They all want to reduce their exposure to the dollar, but do not want any other central bank to panic and have a run on the dollar. But they are certainly giving us plenty of hints to suggest that many of these central banks want to reduce their holdings of the US dollar and diversify into other currencies and gold. Some examples:

• Nov 9/06 – China announces plans to diversify out of the dollar. From Bloomberg: Gold in New York gained the most since June on speculation China will boost purchases of the precious metal to diversify its foreign-exchange reserves. “All central banks are trying to diversify,” People’s Bank of China Governor Zhou Xiaochuan said at a conference in Frankfurt. “We have had a very clear diversification plan for several years.”

• November 17/06 – United Arab Emirates Governor speculates Euro will over take US dollar. From Bloomberg: “United Arab Emirates Central Bank Governor Sultan Bin Nasser al-Suwaidi comments on the outlook for the euro overtaking the U.S. dollar as the dominant reserve currency for international trade… ‘I would say the euro will definitely grow to dominate trade outside the euro area. I expect the euro to become the currency of international trade within 10 years. It will surpass the dollar by 2015.”

• November 15/06 – Volker says investors will ease on dollar holdings: From Bloomberg: “Robert E. Rubin…and former Federal Reserve Chairman Paul Volcker said foreign investors probably won’t keep increasing dollar holdings… Volcker said the U.S. borrowing requirements raise the risk of a ‘crisis’ in the dollar as soon as the next two and a half years. ‘It seems almost inconceivable that this will continue indefinitely,’ Rubin…said…”

In addition to the above, we recently had Australian Treasurer Peter Costello call on East Asia’s central bankers to “telegraph” their intentions to diversify out of American investments and ensure an

st, then there is no negative effect because the dollars stay in the US.

The problem starts when these holders of US dollars decide that they do not want to keep US dollars and prefer to buy or invest into something else, such as exchanging the dollars for euros or some other currency, or gold. As more and more holders of the US dollar decide to reduce their US dollar holdings and invest them into other currencies, the result is a reduction of liquidity in the US.

While there is a great deal of US dollars being held by foreign investors, the biggest holders are foreign central banks. It is these central banks that we believe will start to reduce their holdings of the US dollar to diversify away from one main foreign reserve holding. And we believe that this move away from the US dollar has already begun. Many of these banks have been sending out the word that this is exactly their intention. It is a real juggling act because no country wants to the dollar collapse, especially since most of the central banks still hold a huge percentage of their foreign reserve in the US dollar.

They all want to reduce their exposure to the dollar, but do not want any other central bank to panic and have a run on the dollar. But they are certainly giving us plenty of hints to suggest that many of these central banks want to reduce their holdings of the US dollar and diversify into other currencies and gold. Some examples:

• Nov 9/06 – China announces plans to diversify out of the dollar. From Bloomberg: Gold in New York gained the most since June on speculation China will boost purchases of the precious metal to diversify its foreign-exchange reserves. “All central banks are trying to diversify,” People’s Bank of China Governor Zhou Xiaochuan said at a conference in Frankfurt. “We have had a very clear diversification plan for several years.”

• November 17/06 – United Arab Emirates Governor speculates Euro will over take US dollar. From Bloomberg: “United Arab Emirates Central Bank Governor Sultan Bin Nasser al-Suwaidi comments on the outlook for the euro overtaking the U.S. dollar as the dominant reserve currency for international trade… ‘I would say the euro will definitely grow to dominate trade outside the euro area. I expect the euro to become the currency of international trade within 10 years. It will surpass the dollar by 2015.”

• November 15/06 – Volker says investors will ease on dollar holdings: From Bloomberg: “Robert E. Rubin…and former Federal Reserve Chairman Paul Volcker said foreign investors probably won’t keep increasing dollar holdings… Volcker said the U.S. borrowing requirements raise the risk of a ‘crisis’ in the dollar as soon as the next two and a half years. ‘It seems almost inconceivable that this will continue indefinitely,’ Rubin…said…”

In addition to the above, we recently had Australian Treasurer Peter Costello call on East Asia’s central bankers to “telegraph” their intentions to diversify out of American investments and ensure an

believe that this move away from the US dollar has already begun. Many of these banks have been sending out the word that this is exactly their intention. It is a real juggling act because no country wants to the dollar collapse, especially since most of the central banks still hold a huge percentage of their foreign reserve in the US dollar.

They all want to reduce their exposure to the dollar, but do not want any other central bank to panic and have a run on the dollar. But they are certainly giving us plenty of hints to suggest that many of these central banks want to reduce their holdings of the US dollar and diversify into other currencies and gold. Some examples:

• Nov 9/06 – China announces plans to diversify out of the dollar. From Bloomberg: Gold in New York gained the most since June on speculation China will boost purchases of the precious metal to diversify its foreign-exchange reserves. “All central banks are trying to diversify,” People’s Bank of China Governor Zhou Xiaochuan said at a conference in Frankfurt. “We have had a very clear diversification plan for several years.”

• November 17/06 – United Arab Emirates Governor speculates Euro will over take US dollar. From Bloomberg: “United Arab Emirates Central Bank Governor Sultan Bin Nasser al-Suwaidi comments on the outlook for the euro overtaking the U.S. dollar as the dominant reserve currency for international trade… ‘I would say the euro will definitely grow to dominate trade outside the euro area. I expect the euro to become the currency of international trade within 10 years. It will surpass the dollar by 2015.”

• November 15/06 – Volker says investors will ease on dollar holdings: From Bloomberg: “Robert E. Rubin…and former Federal Reserve Chairman Paul Volcker said foreign investors probably won’t keep increasing dollar holdings… Volcker said the U.S. borrowing requirements raise the risk of a ‘crisis’ in the dollar as soon as the next two and a half years. ‘It seems almost inconceivable that this will continue indefinitely,’ Rubin…said…”

In addition to the above, we recently had Australian Treasurer Peter Costello call on East Asia’s central bankers to “telegraph” their intentions to diversify out of American investments and ensure an

From Bloomberg: Gold in New York gained the most since June on speculation China will boost purchases of the precious metal to diversify its foreign-exchange reserves. “All central banks are trying to diversify,” People’s Bank of China Governor Zhou Xiaochuan said at a conference in Frankfurt. “We have had a very clear diversification plan for several years.”

• November 17/06 – United Arab Emirates Governor speculates Euro will over take US dollar. From Bloomberg: “United Arab Emirates Central Bank Governor Sultan Bin Nasser al-Suwaidi comments on the outlook for the euro overtaking the U.S. dollar as the dominant reserve currency for international trade… ‘I would say the euro will definitely grow to dominate trade outside the euro area. I expect the euro to become the currency of international trade within 10 years. It will surpass the dollar by 2015.”

• November 15/06 – Volker says investors will ease on dollar holdings: From Bloomberg: “Robert E. Rubin…and former Federal Reserve Chairman Paul Volcker said foreign investors probably won’t keep increasing dollar holdings… Volcker said the U.S. borrowing requirements raise the risk of a ‘crisis’ in the dollar as soon as the next two and a half years. ‘It seems almost inconceivable that this will continue indefinitely,’ Rubin…said…”

In addition to the above, we recently had Australian Treasurer Peter Costello call on East Asia’s central bankers to “telegraph” their intentions to diversify out of American investments and ensure an

ct the euro to become the currency of international trade within 10 years. It will surpass the dollar by 2015.”

• November 15/06 – Volker says investors will ease on dollar holdings: From Bloomberg: “Robert E. Rubin…and former Federal Reserve Chairman Paul Volcker said foreign investors probably won’t keep increasing dollar holdings… Volcker said the U.S. borrowing requirements raise the risk of a ‘crisis’ in the dollar as soon as the next two and a half years. ‘It seems almost inconceivable that this will continue indefinitely,’ Rubin…said…”

In addition to the above, we recently had Australian Treasurer Peter Costello call on East Asia’s central bankers to “telegraph” their intentions to diversify out of American investments and ensure an orderly adjustment. Mr. Costello said “the strategy had changed” and Chinese central bankers were now looking for alternative investments. “Of course you can have an orderly adjustment,” he told reporters. “And what I would recommend is that these matters be telegraphed well in advance. I think we should begin preparing ourselves for it.”

The result of all of this is that Ben Bernanke is once again finding himself straddling the teeter-totter, trying to keep the dollar as the world currency, but how does he do it? More and more foreign governments are declaring their intention of moving away from the dollar. The dollar is weak both fundamentally and technically with these increasing calls for “an orderly adjustment” by the central banks of the world, and a slowing US economy that is in the middle of a housing decline.

To save the dollar, Bernanke would need to raise rates. With the housing slowdown in full gear, a higher interest rate would accelerate the housing problems, resulting in reduced consumer spending, killing any chance of avoiding a recession. The other option is to lower rates which will cause the dollar to decline further and faster, which could accelerate the foreign investors and central banks’ plans to diversify out of the dollar.

If the dollar does crash, the US interest rates would need to rise as the market will demand higher rates for those willing to buy or hold dollars. But how can Bernanke raise rates with billions of dollars in adjustable-rate home mortgages in the process of resetting? He has hinted he just might do that. The reason - the Fed may just have to decide that a recession, in the long run, would be better than a dollar collapse. They may simply decide that the dollar’s “integrity” and world reserve status must be maintained at all costs.

To date The Swiss, the Russians, the Italians, the Japanese, the Chinese, and the United Arab Emirates have all announced that they were reducing their dollar holdings. China has about $700 billion in US dollars as the majority of their foreign currency reserves. As noted by Fan Gang of the national Economic Research Institute of China “The U.S. dollar is supposed to be the anchor that stabilizes the global currency market,” he said “Instead it is a major source of instability.”

We do not know what is going to happen here, but we are prepared for a falling dollar. As we watch the markets make the decisions, we feel a little more comfortable holding our gold and silver.