An Alternative Strategy To Protect Investors Against A Collapsing U.S. Dollar

Investors have inquired about devalued dollar investments, investments for a dollar collapse, and have asked “will inflation cause a crash?” The standard answer that most advisors offer is that to protect from a possible collapse of the U.S. dollar one should invest in gold, silver, precious metals, oil, energy stocks, stocks of companies that save on the cost of fuel such as railroads, etc.

An alternative technique to protect from a possible collapse of the U.S. dollar one should consider investing in foreign currency.

How does one invest in foreign currency?

• Open a bank account denominated in foreign currency

• Buy U.S. based actively managed mutual funds or ETP’s that invest in foreign currency

• Buy U.S. based actively managed mutual funds or ETP’s that invest in foreign currency denominated bonds

• Buy commodity futures contracts for foreign currencies

• Buy options on foreign currency

The Least Risky Strategy

All of these have risks. The least risky may be actively managed U.S. based open-end mutual funds because the management tries to forecast the risks and make changes. By contrast a passive investment has no one other the individual investor to manage the risks. ETP’s have the risk of counterparty default and tracking error, which can be a concern. Options have counterparty risk and risk of expiring worthless. Futures are highly leveraged and have risk of Backwardation and Contango which produces tracking error.

Few U.S. banks offer foreign currency denominated accounts. By buying mutual funds that hold bonds denominated in foreign currency the investor is getting investment management from the mutual fund and interest earned on the bonds and may get appreciation of the assets. Of course there is risk that the bonds could default. Many Emerging Markets bond mutual funds have a “BB” grade credit quality for their holdings, which is one notch below investment grade, meaning it is junk bond grade. There is always risk in investing. The good news is that carefully selected portfolio of bonds in a mutual fund that has holdings rated an average of “BB” or “BBB” may have a standard deviation (a measure of risk) of 13 which is better than the stock market’s standard deviation of 20. Past performance is no guarantee of the future.

I certainly hope the dollar regains its health and then stays healthy. To make it healthy requires producing better goods and services for export, and making the government solvent. If politicians won’t take steps to make the government solvent and make American exports competitive then the dollar will continue to suffer. We need to compete not only in terms of making quality export goods but also in terms of having a high quality, solvent government. For example, when people find out how insolvent U.S. Social Security is compared to Singapore’s retirement system is then people may wish to avoid investing in the dollar or in U.S. Treasuries.

About the author

Don Martin, CFP®

3 Comments

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  • In Canada, I can walk into any tiny bank in any village and deposit money in an interest bearing certificate of deposit in any denominated currency in the world.

    I wish to roll over money from an IRA to one denominated elsewhere, say Canadian, Australian, Zlotneys(if you wish).

    Why is this such a problem with US banks?

    Is there a solution other than simply buying an alternate currency. I’m old fashioned enuf to want some interest on my investment other than currency fluctuations.

    I’ve been moving every loose penny to Canada for the last several years when it became clear that our countr is circling the drain and unlikely to soon recover, if ever.

  • Due to failing health, a relative of mine who has been helping me pay for my “re-education” wishes to put all of the money with me now. Unfortunately, I am in the early stages of fixing income tax returns that have not been filed for over a decade. Other than fines, I expect to owe little or nothing, given the dire circumstances and poverty level I “enjoyed,” but we shall see. Nonetheless, I certainly do not want school money dumped on me in the middle of IRS negotiations, and I am seriously worried about the dollar at the same time, nor do I want to get involved in anything illegal while trying to turn my life around.
    So, I want to know how to buy silver/gold/farmland hedges against the collapse of the dollar without using a social security number NOW so that I can take possession of it without a transaction trail when my taxes are resolved. Yes, it will be income at that time and taxes paid accordingly.
    Please advise.

    • have you checked out some the offshore financial centers like Switzerland, Liechtenstein, Singapore, Panama, or Uruguay? Google The Sovereign Wealth Fund to learn more about legal ways to stash your money offshore.

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