Last column concluded with the comment that the fallout from the national debt may present a major opportunity to investors and their portfolios. There are three main ways to take advantage of the debt and the resultant falling dollar.
Foreign Bonds
The most obvious way to potentially benefit from a falling dollar is to buy foreign bonds.
Essentially, this strategy involves buying foreign money. Buying money is a strange concept to most of us — in fact, it seems kind of redundant. Yet, foreign currency exchange (as it is more properly named) has been practiced for hundreds of years, and was certainly popularized by Catholic bankers at the height of the Medici Bank’s glory in the fifteenth century.
The premise of the currency speculator is simply this: He believes that the currency he is purchasing will be worth more in the future than the currency with which he is buying it.
An example of this would be buying Australian government bonds with US dollars, or buy foreign corporate bonds. Although you have to do a lot of searching for the right fund, there are actually mutual funds that invest in baskets of foreign government bonds. These may prove to be an excellent hedging strategy against a potential dollar decline.
Foreign Stocks
For the past few decades, portfolio technicians have argued that portfolio risk is actually reduced by investing a portion of portfolio assets in foreign companies stocks. Still, many investors have remained cautious, unsure of what awaits them in foreign markets. However, if the dollar begins falling precipitously, fear will be a luxury few can afford.
If foreign currencies strengthen against the US dollar, foreign financial markets will likely strengthen against our markets as well, presenting a significant opportunity. Hypothetically, let’s say you buy stock in an Australian company that rises 10% in one year — that means you’ll make 10% on your money, right? Not so fast. All other things being equal, if the Australian dollar rises 10% versus the American dollar, you may actually earn 20% on your investment, with 10% coming from the stock’s actual appreciation and another 10% on the currency exchange.
Using this example, you could actually be wrong about the stock, and still make money. If the currency in which the stock is denominated rises 10% against the dollar, and the stock is actually down 5%, you may still make money by investing in the stock that dropped.
Gold Mining Companies
Governments and currencies have come and gone, but since the dawn of time, gold has retained its value. This has remained true even though from time to time, something apparently safer than gold has appeared. Between the conclusion of World War II and more modern times, it seemed as though US government bonds served as a surrogate for gold. That time has passed.
“What’s safer than the US dollar?” That used to be a rhetorical question, but with the swelling public debt, not to mention massive trade and budget deficits and ubiquitous consumer financial obligations, that question is no longer rhetorical.
“What’s safer than the dollar?” Answers abound.
Famous wordsmith and Yankees catcher Yogi Berra once quipped: “A nickel isn't worth a dime today.” His comment is not without logic, as it suggests depreciation is a fact of American economic life, and that the value of money fluctuates. However, there is a way to determine how much the dollar is worth, and the way to do this is to check the price of gold. Gold is the quintessential yardstick used in the determination of a currency’s value.
Economic historian Joseph Schumpeter wrote that: “The modern mind dislikes gold because it blurts out unpleasant truths.” The unpleasant truth that gold is currently telling us is that the American dollar might be headed for trouble.
As gold soars over $600 an ounce, we once again have to ask whether gold can actually be replaced by anything else as the ultimate portfolio protection for the investor.
Thanks for the question.
(John Clark is a Registered Investment Advisor and a nationally-recognized expert in the field of ethically-responsible investing. You may email him questions for this column at jclark@lasalle-st.com or call him directly at 1-888-764-2423.)
