OK, ok, the photo is a bit hyperbolic, but it raises an essential point. Whether or not you view the trending weakness in the US dollar a good thing, it makes sense to protect your money from further downside.
Why, you may ask, should you hedge against USD weakness if you never leave the US or buy foreign stocks? Lots of reasons.
If the USD weakens faster than global currencies (which it is, despite all the competitive debasement going on), your purchasing power is slowly dwindling. Foreign goods (like Toyota Priuses) become more expensive in US dollars and even US companies will raise prices if they maintain an international labor force (where they pay Chinese workers in renminbi) or need international commodities to make their products.
In short, there is no way to really ignore the effects of inflation in the US money supply. It’s going to bite you sooner or later. Might as well do something to mitigate it.
How To Get Ready For Double-Digit Inflation
Diversify Out of US Dollars and Protect Your Purchasing Power
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1. Buy precious metals. Mostly gold, but silver too. You might even see greater potential for a rise in the price of silver. But you already knew about buying gold. All the factors are in place for gold’s price to continue to rise. Don’t shrug it off as a mere trend or “fad” just because you saw some hokey late-night gold infomercials.
Should You Invest In Bullion, Stocks or Gold ETFs?
2. Buy foreign currencies. Literally take some of your USD into the nearest, cheapest exchange (you might have to order currency in advance through a major bank) or bank and use them to buy yuan, yen, Canadian dollars, Australian dollars, Brazilian real, Swiss Francs or Euros (skip the pound, it’s not doing well lately).
3. Buy foreign stocks & bonds. Amplifying on the above move, you might gain more upside by taking on more risk and investing in foreign equities and bonds like Canadian income trusts. You could do this through international ETFs (held in foreign currencies, not in USD), or through ADRs, or purchase them directly on foreign exchanges if you have access to a foreign brokerage. Talk to your investment bank to find out what your options are.
4. Buy the stock of US companies that make most of their earnings internationally. No need to right out buy foreign stocks if that is too risky for you. Just use your greenbacks to purchase shares of US multinationals like Coca-Cola, which gets most of its profits overseas in international currencies. Granted, you will still be paid in US dollar dividends, but at least you will also see the upside from emerging market sales. This is probably the least desirable option of these four, but even this is still better than keeping your cash tied up in US bonds, which are, obviously, dollar-denominated.
World Bank: Don’t Take USD Reserve Status for Granted
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{ 5 comments… read them below or add one }
Like I’ve argued extensively, “A Weak Dollar Doesn’t Matter Folks!”
Why would you get out of the US dollar now? That’s classic herd panic mentality.
Well, the USD is not primarily an investment – I don’t think the “herd” criteria applies here the way it would with the stock market hitting new lows and that being a bad time to sell your investments. I’m just talking about purchasing power for the average American. If most of your investments are, say, in small-cap US companies that work domestically, and the USD keeps dwindling, their profits dwindle in purchasing power, too, so will your investments with them. If it’s a good thing to diversify into foreign investments at all, then it’s an even better idea now and for the same reasons.
Personally, I think a foreign currency ETF may be a smart (and easy) choice for some that want to go this route but I don’t think there is really any need to start hoarding Euros under the mattress or anything just yet :)
@CCC – foreign currency ETFs are a good choice, too. Especially the more liquid they are – easy to buy, easy to sell.
Thanks for your site, very informative and extremely helpful. I just finished reading Peter Schiff, Crash Proof.
Keep up the good work!
Best
Scott