Monday, October 5, 2009

Investors Should Run From The US Dollar

The risk of inflation taking a bite out of your portfolio can be averted by diversifying your dollars into other currencies or gold. David Galland from Casey Research discusses why it can be dangerous to have all your eggs in the dollar basket, and what currencies have the best fundamentals. See the following post from Daily Wealth for more.

Last month, I faced a difficult question: "What are the best foreign currencies we can park cash in?"

At Casey Research, we strongly believe no foreign currency is worth much more than the intrinsic value of the paper it's printed on.

Most governments have followed the lead of the U.S. when it abandoned the gold standard. All of these governments like the flexibility of being able to print money freely and use inflation as a hidden tax on their citizens.

Even conservative Switzerland has progressively uncoupled its currency from the gold that used to back it up (up until 2000, the Swiss central bank had a legal requirement to hold gold reserves equal to 40% of its currency).

That said, in a world where one needs to have access to cash quickly, it makes sense to park one's cash in a basket of currencies as opposed to having it all in U.S. dollars.

While one may speculate on specific currencies, it is very important to remember that short-term volatility is all but impossible to predict.

In the short run, exchange rates are more likely to be affected by government policies than by fundamentals. To anticipate these is a fool's game we would not want to play. And in the long term, the only form of money we want to hold is gold (and silver).

Our recommendation for those who want to diversify their cash holdings is to park a higher percentage of their cash in currencies that have stronger fundamentals than the U.S. dollar, the British pound, or the euro.

We generally like the Canadian dollar and the Australian dollar, as both countries have had relatively more conservative monetary policies than the U.S., the EU, or the UK.

In addition, their economies are strongly dependent on natural resources, which we see as the best hedge against inflation. Canada, for instance, is the United States' largest foreign oil supplier. Australia is full of gold, copper, uranium, and natural gas... all of it easily transportable to China. Over the coming years, these "commodity currencies" will hold up much better than the dollar. So consider these when looking for a dollar alternative.

Another choice would be the Swiss franc, as that country is still conservative and still apparently committed to hold 20% of the value of its paper currency in gold. Over the past three decades, the Swiss franc has held more of its value than most other major currencies in the world; no future guarantees, but a good track record.

Another prudent strategy could be to hedge against short-term volatility and to build a portfolio of currencies that would spread across all major denominations.

The million-dollar question is "Where can I park my cash?" The answer is, "Park it in several different places."

Make sure to keep a good portion of your savings in gold and silver. How much you hold really depends on who you are and what your tolerance for risk is. At this point, almost everybody should have 15% of their money in gold, up to as much as 30%. Importantly, don't chase the price. Inflation won't make itself known for some time, but there will be a lot of volatility in the financial markets, periodically pushing gold back. So, buy on the dips. But buy.

And consider getting diversified into the currencies listed above.

Those are the strategies we recommend. For tactics, Casey Research has found an easy way to park our money in a broad basket of foreign currencies – while retaining maximum flexibility and minimizing transaction costs – is to open World Currency Deposit Accounts or CDs such as those offered by our friends at EverBank.* It's the easiest, most hassle-free way to take the steps I've just outlined.

This post has been republished from Steve Sjuggerud's blog, Daily Wealth.

* David Galland was a founder and former partner of EverBank and still owns an inconsequential amount of stock in the company.

1 comment:

Anonymous said...

Thanks for a sensible article on this subject. There are too many others that are done in self interest promoting a blind flight to gold. Diversity among several fiat currencies and balance of precious and semi-precious commodities is a far better hedge IMO.