As our trade defict approaches the $2B a day mark, I'm reminded of a a quip from one of the classical economists (Schumpeter, perhaps?): Anything which cannot go on forever will eventually stop.
I've yet hear a reasonable refutation of the above, either from dollar bulls or from the 'oil-isn't-running-out' crowd. It seems to me the only thing open to debate is when it will stop, and how ugly it will be.
For those of you who, like me, are concerned that the answer to the above is 'pretty soon, and pretty ugly', you may be looking for a way to protect whatever investments you have. I've done a reasonable amount of research in this area, so I thought I'd share my results here.
In one sense the answer seems straightforward, and it is. Namely, to do one or more of the following: (1) convert dollars to some foreign currencies, (2) buy assets denominated in foreign currencies, (3) buy a commodity that holds value, like gold. The problem for the retail investor is that, until recently, it was very hard to do these inexpensively (especially #s 1 and 3) unless you have a lot of money. Fortunately that's no longer the case. Below I'll discuss options for doing all three of these with 'retail investor' type money.
(1) Buying foreign currency. When I came back from living in Paris, I had a chunk of Euros in a french bank that I wished to keep, but it wasn't worth the hastle of maintaining an inconvenient and fee-laden french bank account. So I did quite a bit of research to see what my options were. The best option I found, surprisingly, was a St. Louis-based bank called Everbank. I was able to transfer my Euros there and, more importanly, one can buy any number of foreign currencies with dollars at a reasonable rate (75 basis points off the spot market, for the cognoscenti out there). This struck me as a very good deal.
What's more, in some currencies, you can actually buy a CD! So my Euro, besides appreciating against the dollar, have been paying me interest at a higher rate than one would generally find in the US. And more importantly for the retail investor, you can buy in at small amounts (1k or 2.5k or something, I think). After opening my account I bought more Euro and a bunch of Yen and then added to the balances again this year, during my annual rebalancing.
(2) Buying foreign assets (stocks). Vanguard makes this easy and cheap. They have a Europe index fund (VEURX) and a Pacific Index fund (VPACX) that are cheap to buy through their site. Some may even be able to do this through their 401(k) or 403(b) accounts. Since these funds buy stocks denominated in Euros and the Asian currencies, they will not be (directly) affected by drops in the dollar. In fact, from the perspective of an investor in the US, they will rise as the dollar falls. (Of course, some of the companies the fund buys are hurt indirectly by the drop in the dollar, but that's another matter).
(3) Buying gold. There is a new ETF (exchange-traded fund, essentially a mutual fund that trades like a stock) called StreetTracks that tracks the value of gold which now trades on the NYSE under the symbol GLD. The way this works (oversimplifying, but this is the idea) is that the group that formed this ETF buys a bunch of gold and stores it in a warehouse somewhere. Then they issue these shares of 'GLD' in proportion to the amount of gold they have purchased - 10 shares for each ounce. Each share, therefore, corresponds to ~1/10th oz of gold, so when gold is selling at, say, $425 per oz the GLD shares are selling at $42.50. When the price of gold rises (or falls), the GLD 'stock' rises (or falls) proportionately. So, anyone with a retail brokerage account can effectively buy gold with relatively low transaction costs and storage fees. Just buy 'GLD' as if it were any other stock. Nice, huh? This has only been available since about November of 2004.
For what its worth, I do some of each of the above. In my particular case, I keep about 30% of my liquid assets in foreign currency, foreign currency-denominated assets, or gold. This is up from around 25% last year.
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