The following article is written from the perspective of the US dollar. But as New Zealanders we can use the same logic to consider our exposure to a single currency so it’s worth reading and substituting the NZD for the USD and asking yourself the same questions…
By Jeff Clark, BIG GOLD
Have you considered what will happen to your portfolio―and all the other areas of your life―if the dollar fails? The ramifications will be widespread, painful, and inescapable if you’re not properly diversified.
Last month, I attended the Global Currency Expo sponsored by EverBank. The overarching theme, as you might expect, was that diversification out of one’s home currency is paramount. While there were plenty of traders on hand, it was the big-picture talks that had the most pressing messages.
I came away feeling that I needed to reexamine my exposure to the dollar. Have you considered what will happen to your portfolio―and all the other areas of your life―if the dollar fails? The ramifications will be widespread, painful, and inescapable if you’re not properly diversified.
With that in mind, I want to pass on some highlights from a few speakers, along with their investment recommendations… many of which were framed as the “trade of the decade.”
Frank Trotter of EverBank Direct stated that the U.S. dollar “will see a significant decline in the next 5-10 years.” His five favorite currencies for the next decade are the Swedish krona (which he thinks is better than the Swiss franc), the Norwegian krone, the Australian and Canadian dollars, and a surprise, the Brazilian real.
Eric Roseman of Commodity Trend Alert warned that we’ll see a food crisis within three to five years. He’s convinced China will become a net importer of agriculture, which will have major ramifications around the globe. His trade of the decade is the exchange-traded note for grains, JJG.
Sean Hyman of World Currency Watch said his trade of the decade is the Singapore dollar (SGD). “Buy it and forget it.”
Doug Casey also spoke; he laid out five “sure things” for the next ten years:
- Short bonds/bet on rising interest rates
- Short the yen/go long on Japanese small- and mid-cap stocks
- Borrowed money: “It’s an excellent way to short the dollar, and you get a tax deduction.”
- Gold: “It’s not cheap, but it’s going higher. Buy it and store it abroad.”
- Small-cap mining stocks
Rodney Johnson, president of HS Dent, got some audible groans from the audience when he claimed the trade of the decade was the U.S. dollar versus the euro. He’s convinced that deflation is coming and that inflation hedges will get hurt. He predicted that the dollar will rebound and that interest rates and prices will fall. While it’s always healthy to check one’s assumptions, I heard no reason to change my mind about the dollar’s long-term woes. Interestingly, most of the speakers do expect the dollar to temporarily strengthen this summer, though they have no doubt the currency is ultimately headed to the graveyard.
But the most thorough and convincing presentation by far came from Chuck Butler, president of EverBank World Markets and a 35-year currency analyst. If anyone knows currencies, it’s him. It’s been said that he’s advanced awareness of the currency markets more than almost any other banker working today.
Chuck outlined the case against the U.S. dollar with damaging conviction. He pointed out that the pound sterling was the world’s reserve currency until WWII, and “we became the reserve currency by financing England because they couldn’t pay their debts and had diluted their currency… They needed assistance from other countries to service their debt and had overextended their military.” Sound familiar?
He noted that China, with little fanfare, started signing swap agreements in 2009. To date, they’ve signed agreements with much of Asia, the European Union, Canada, Russia, Brazil, Belarus, Argentina, and will soon with Japan and Korea. There are even rumors of them working on currency swaps with the Arab nations. He reminded us that China’s president recently stated publicly that the U.S. dollar is a “product of the past.”
The scary ramifications of this were couched in a stark warning: “The U.S. dollar will lose its reserve currency status sometime between 2014 and 2020. There will be no trumpet; it will just happen.”
He said SDRs (Special Drawing Rights) from the IMF may be used first, but that it won’t matter since the dollar losing its reserve status is “inevitable.” He, too, felt there will likely be some strength in the greenback this summer, but that this will change nothing in the long-term picture.
When it comes to preparing one’s investments for this eventuality, Chuck stated that “94% of investment return is based on the asset-class selection, and a low covariance with other assets.” On a practical basis, this means owning an investment that is not correlated with U.S. stocks, and one that is not denominated in U.S. dollars. He said the key to diversification is applying the same logic you would to stocks: “You wouldn’t buy just one stock, so why would you own just one currency?”
He likes the renminbi, which can be played via CYB or CNY. He also likes the Singapore dollar, the Norwegian krone, and the Swedish krona.
The point of the weekend was to examine one’s portfolio from the point of view of a failing currency. It won’t matter too much how diversified your stocks are if they’re all exposed to the same currency. If this outlook turns out to be correct―and I see no way around it―then the U.S. dollar will undergo a sea change that will erode and ultimately destroy any investment backed by it.
So, how much exposure do you have to the U.S. dollar? And what happens to your portfolio when the greenback reaches its ultimate resting place? Even if you think it avoids becoming fancy green toilet paper, prudence suggests that you at least consider preparing your investments for a prolonged erosion. By the time you carry your investment “bucket” to retirement, the persistent leak from dollar devaluation could buy half of what it did ten years earlier. Will this be acceptable to you and your family?
Gold and silver are one of the easiest and simplest ways to diversify out of the dollar, regardless of one’s portfolio size. They are a confidential, personal, and immediate purchasing-power protector. Pretend your financial life depends on it, because the abuse continually heaped upon the dollar doesn’t come free of consequences.
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