With the dollar continuing to sink against major currencies, a hedge or alternative place needs to be found to store idle funds. We take a look at some alternatives.
In the past when people had faith in the US dollar, simply keeping your idle funds in a checking account or money market account was fine. That was then, this is now.
The dollar should continue to fall unless something changes.
The US cannot continue to have trade deficits every year. The trade deficit every year in the US is about 700 billion dollars and gowing every year while China recently had a surplus of $180 billion dollars.
Warren Buffett has proposed that the US give import certificates to US exporters for the dollar amount of items that they export. Then the import certificates could be auctioned off to the highest bidder for the right to import that dollar value of goods. Such a system would make sure that has balanced trade.
The other problem haunting the dollar is social security/medicare and military spending. Until these expenses are cut significantly, the dollar will be weak.
So where should you put your idle funds? There are several options:
- Keep money in checking / money market acct (most likely lose money to inflation)
- Open Everbank world currency money market account (lose money in conversion fees)
- Open HSBC offshore bank account.
- Buy Euros or other currencies that are stronger than the dollar
- Hedge with a currency fund.
- Buy gold
- Buy ADR stocks or stocks with a high % of business outside the US
All of these options have potential negatives. The first option will most certainly lose money to inflation but will have the lowest fees and convenience. The second option has fees associated with conversion (1% for each conversion) so a total of about 2% to get your dollar to euros and back to dollars. This elimates this option for the short-term.
HSBC offers an offshore bank account option but requires $10,000 initial deposit and a balance of approximately $50,000 a month or else a $50 fee is imposed each month.
There is no way to short the dollar by itelf. The value of the dollar is always $1. How far that dollar is another issue. However, if we believe the dollar will fall relative to another currency, simply buying the other currency will allow us to hedge against a falling dollar. This can be done by purchasing on FOREX. High initial deposit requirements makes this an option for high net worth clients but not for others.
Another option is to purchase a currency index fund that invests in assets that should increase in value relative to the dollar. The Merk Hard Currency Fund invests in assets and T-bills from countries other than the US. When the dollar falls relative to these currencies, the fund increases in value.
There are also exchange traded funds (ETF's) that offer specific currencies. Currencyshares for instance, has funds that mirror Euro's, and other major currencies. If you believe that the Euro will continue to rise against the dollar, you can purchase the Euro Trust fund which is 100% invested in Euros.
A leveraged fund exists which is supposed to be inversely related to the dollar times two. Rydex Weakening Dollar 2X Strategy is the fund that does this.
Buying gold is a way people in the past have hedged against a weak dollar. Others have also purchased it in the past on fears that if the goverment were to fail, gold would still have it's value. The problem with gold is that it seems very speculative in nature. If you don't believe that the government will fail completely and aren't into trend following behavior, then gold has to be valued based on what it is used for in business such as jewelery and semiconductors. If we look at it from this point of view, gold is way overvalued. Gold's value is now based on speculators that simply buy it because they fear we are going into a recession or as a hedge to the dollar. So, looking at the fundamentals, gold is not something that looks like a good hedge. Buying other currencies would be a more appropriate hedge.
Buying ADR's or companies with a strong foreign presence will also help to hedge against the falling dollar. However, buying stocks is doing much more than hedging. It is investing and not hedging. Buying stocks takes on additional risks. The point of hedging is simply to cover the value of your portfolio from losing to inflation. Finding stocks that meet the criteria and are at the right price is also tricky. This is more of a long term option and not a place to put idle cash. Finding currencies that are at a reasonable value relative to the dollar seems much more likely than finding stocks that are reasonable and a good choice.
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