Warren Buffett's View of the US Dollar

If asked for the great names of art, theater and science, people immediately respond with giants like daVinci, Shakespeare and Newton. When someone mentions finance to me, the outstanding name that comes to my mind is Warren Buffett.

When Warren Buffett speaks, I listen. And in this regard, two recent articles are extremely important.

In an article about Mr. Buffett, Barron's wrote last month:

"Buffett, who has spent a lifetime successfully playing the percentages, says that buying Treasury bonds at current levels probably isn't a smart move. He noted that Berkshire could be earning $1 billion more annually on its investment portfolio if it shifted its cash holdings into longer-term Treasuries, but Buffett doesn't believe the risk is worth the added income." [emphasis added]

Mr. Buffett is walking away from $1 billion a year because he says the risk of US Treasuries isn't worth it. What 'risk' is he referring to? Could it be the risk that arises because US Treasuries are denominated in US dollars?

Mr. Buffett inasmuch confirms this conclusion in an article written by him and published just recently in the online edition of Fortune. He says:

"Through the spring of 2002, I had lived nearly 72 years without purchasing a foreign currency. Since then Berkshire has made significant investments in and today holds several currencies. I won't give you particulars; in fact, it is largely irrelevant which currencies they are. What does matter is the underlying point: To hold other currencies is to believe that the dollar will decline."

It is not hard to understand what Mr. Buffett is saying. In the past couple of years a number of respected leaders in finance and investing have recommended diversifying out of the US dollar. They include Soros and Templeton, and now Buffett has joined the parade. For the first time in his life, this top name of finance is betting against the US dollar.

We can easily envision what these guys are seeing. The US dollar has obvious problems, and there are more attractive alternative monies out there to hold one's liquid wealth. I could list all the factors that are causing the dollar to be debased, but the accompanying chart of the US Dollar Index says it all.

The major uptrend in the Dollar Index has broken, and this important measure of the dollar's health relative to the other major currencies of the world is now in a severe and protracted downtrend.

Interestingly, the Dollar Index is breaking into new 7-year lows, while gold is breaking into new 7-year highs. And their respective trends are well established. Therefore, expect more of the same. Will it be long before we see 8-year lows in the dollar and 8-year highs in gold?

Published by GoldMoney
Copyright © 2003. All rights reserved.
Edited by James Turk

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