foreign currencies

All posts tagged foreign currencies

After hitting a high of $1.51 just six months ago, the euro broke the $1.30 level and is currently trading at $1.28. Greece’s inability to repay its debts has dragged down the euro and proposed austerity measures have led to rioting.

 euro-vs-dollar-may2010

After European Union eventually bails out Spain, Portugal, Ireland and Italy the euro might trade on parity with the dollar!

I wish I hadn’t been so quick to close my long position on the EUO May $21 calls last week!

With the financial crisis and currency devaluation, the long term prospects for gold are still looking good too.

In the last post we saw that China was slowly diversifying away from it’s usual investments in US Treasury Bonds and investing in hard assets, natural resources and maybe other currencies.

There probably a very good reason why the world’s second largest holder of US Dollars is weaning itself away from bonds issued by the world’s largest debtor nation.  If you believe the Chinese know what they are doing, it might make sense to imitate their investment strategy.

While you don’t need to buy $80 Billion worth of gold, you might do well buying gold equal to at least 5% of your net worth. Gold is not an investment in itself but a historic store of value. Regardless what anyone tells you, the US Dollar is not a store of value. During times when governments print money hand-over-fist, gold typically does well. In fact, over the past 10 years, gold has appreciated against every single currency.

You can either buy the physical gold, gold ETF(GLD) & gold mining stock ETF (GDX), gold certificates or a custodial account. You can also buy silver and silver ETFs in a similar fashion. There was a recent Chinese news report recommending Chinese investors buy silver since its a better value than gold!

You can also exchange your US dollars directly for foreign currencies. Everbank currently has a Marketsafe BRIC CD, which invests in a basket of Brazilian Real, Russian Ruble, Indian Rupee and Chinese Remnimbi.  This CD doesn’t pay any interest but the principle is protected against loss! But if you’d rather take a risk and earn some interest, Everbank has a slew of CD products in several European and Asian currencies.

Another option are the CurrencyShare ETFs for Australian Dollars(FXA), British Pounds(FXB), Swiss Francs(FXF), Japanese Yen(FXY) and Euros(FXE).  Another ETF worth considering is UDN, an inverse US Dollar ETF, which is a basket of the above mentioned currencies. (However, inverse ETFs may not accurately follow the downward movement so you’re cautioned to do some research).

I do not recommend forex-trading as a means of hedging yourself against Dollar devaluation. Forex trading is a highly leveraged, zero-sum speculation. In a zero-sum game, a participant can only win at the expense of another participant. In fact, it may be considerably less than zero-sum becauase your brokerage can run your stops (which it can see) and effectively trade against you.

If you are thinking of investing in currencies, definitely check out Everbank’s free newsletter, the Daily Pfenning. It provides a very informative (and entertaining) look at global economics and investing. Actually, you should subscribe if you do any sort of investing! Everbank also has a low-cost custodial account for gold and from time to time (whenever the price of gold drops dramatically) they offer a MarketSafe (which means principle-protected) Gold CD. Sign up for the newsletter and they’ll inform you whenver they come out with new products.

If you have a penchant for natural resources, you should look into Master Limited Partnerships (MLPs) like Tortoise Energy (TYY) or Kinder Morgan (KMP). Both pay a juicy dividend that is considered a return of principle and thus non-taxable (although it does alter cost-basis). However both have appreciated significantly this year. Canadian Royalty Trusts like Enerplus Resources (ERF)  are also an option.

You can also buy natural resource stocks like Rio Tinto (RTP) or BHP Biliton(BHP). China has been trying to buy multi-billion dollar stakes in companies like these and is currently unsuccesful. If you think that a day may come where Chinalco will be successful, you might want to get in before that happens.

IRSA International (IRS) is an Argentinian company that trades on the ADRs.  It owns farm land, resorts, hotels and shopping malls in prime locations.  After decades of “quantitative easing” (another word for printing money) wreaked havoc on their economy and standard of living, Argentinians don’t trust banks or central bankers. They trust gold and farmland. The way the US economy is going, we too may come to that same conclusion. Just to be safe, I bought some of the stock. On the other hand, you might be better off buying farmland or a ranch for hunting. I’m pretty sure, buying farmland is next on China’s list!

Disclosure: I own ERF, TYY,FXA, IRS, Everbank MarketSafe Japanese REIT CD, GDX and physical gold/silver.

The market has been defying gravity this summer, with the S&P500 up 49% since March. But most of the appreciation has been in what I consider lower quality stocks. Many homebuilders with doubtful prospects have doubled from their recent lows, while stocks that are somewhat recession proof like McDonalds, Walmart, Coca-Cola and Procter & Gamble have bounced a mere 15-20%.

According to Bloomberg, “companies with the worst earnings led the 45 percent gain in the Standard & Poor’s 500 Index since it fell to a 12-year low five months ago”. It might be a good time to sell some of your winners that have exceptionally well and either wait for a pull-back, or if you’re trigger happy, buy solid investment-grade companies.

Given the current economic environment with the US Dollar likely to devalue against foreign currencies and the high probability of inflation, you want to invest in a company with exposure to foreign markets, a stable business model that is non-cyclical and a history of growing dividends. You also want to avoid luxury brands or businesses that sell expensive goods.

Here are a few of the companies that I would consider looking at, along with their dividend yields.

  • Verizon Communications (VZ): 5.87%
  • Johnson & Johnson (JNJ): 3.21%
  • Procter & Gamble (PG): 3.28%
  • Colgate-Palmolive (CL): 2.41%
  • Unilever (UL): 4.39%
  • Altria Group (MO): 7.10%
  • Philip Morris International (PM): 4.61%
  • McDonalds (MCD): 3.55%
  • Walmart (WMT): 2.51%
  • Enerplus Resources Fund (ERF): 9.56%

While I don’t own any of these yet (except ERF), I do own some ETFs that hedge against dollar devaluation and inflation:

  • CurrencyShares Australian Dollar Trust (FXA): 2.04%
  • Morgan Stanley Emerging Markets Domestic Debt Fund (EDD): 7.45%
  • Market Vectors TR Gold Miners (GDX): 1.90%

If you are going to buy currency ETFs or currencies you might want to also check out some of the risk-free currency CDs offered by Everbank. At the very least, definitely subscribe to their free newsletter, the Daily Pfennig. It’s quite informative and very interesting.

ETFconnect.com is a great site to find out more information about ETFs.  Having some exposure to foreign currency and gold miners isn’t a bad idea. I’ve been worrying about the effects of the Federal Reserve printing money like its going out of style and the CEO of Coeur d’Alene (CDE), a silver mining company that I happen to own, predicts that Silver will jump 29% by the end of the year because of this.

Demand from investors seeking a store of wealth accounts for more than half of silver’s 23 percent price jump this year before today, Wheeler said in an interview in New York. The metal will reach $18 an ounce with supplies little changed and demand buoyed by purchases from exchange-traded funds, he said.

“We have this crushing new debt and dollar weakness,” Wheeler said today. “The outlook for precious metals is very positive, and silver will be No. 1.”

The U.S. government has pledged $12.8 trillion, an amount that approaches U.S. gross domestic product, in a bid to stem the longest recession since the 1930s. The spending will erode the value of the dollar and boost the appeal of silver and gold as alternative assets, Wheeler said.

“There’s a lot of anxiety out there over this debt,” Wheeler said. “Around the world, there are a growing number of investors who want protection. They’re going to want silver as part of their portfolio.”

If you believe any of this, you might want to increase your exposure to silver miners like CDE, SSRI or SLW, although these don’t pay any dividends.

Disclosure: I own ERF, CDE, FXA, GDX, EDD, physical gold and silver.

While the debate between inflation and deflation keeps on going, I’m firmly in the camp of inflation. And so is Warren Buffett, as are many other investment advisors. So how do you protect yourself and your investments from the effects of inflation?

Investment newsletter editor, Keith Fitz-Gerald, recently had a post on his blog regarding the 4 ways to protect your investments against inflation. Here’s an excerpt:

What’s interesting is that many investors holding large cash positions view their money as an asset, when, ironically, it’s really more of a liability at this stage of the game.
Some might take issue with that statement. After all, even we at Money Morning have counseled readers that cash – correctly deployed – can allow an investor to sidestep the worst stretches of a financial crisis, like the one from which we’re currently attempting to extricate ourselves.

But when the markets are as beat up as they as they have been, history suggests there’s probably more upside than downside – even if we haven’t bottomed out yet.
And there’s a broad body of research to support that contention – including our own newly created “LSV (LIBOR/Sentiment/Value) Index” (published as a part of The Money Map Report, the monthly investment newsletter that’s affiliated with Money Morning).

There’s also data sets widely published by others, such as Yale Economics Professor Robert J. Shiller. Shiller has found that when you look at 10-year periods of Price/Earnings (P/E) data dating all the way back to 1871, the markets tend to rise when the average P/E is low, as it is right now. Conversely, when the average Price/Earnings values are high – as they were in late 1999, and again in 2007 – a decline in stock prices is much more likely.

There are obviously no guarantees that history will repeat itself. But if it does, the same data implies we could see real returns of 10% a year or more “for years to come,” as Shiller noted in a recent interview with Kiplinger’s Personal Finance.

My own research seconds the general-market-increase theory, but I’m much more conservative in my expectations of returns and think that returns of 7% are more likely.

Perhaps what’s more important right now is that inflation typically accompanies growth – and with a vengeance. And that means that investors who are sitting on cash “until the time is right” may have their hearts in the right place but are relying on the wrong protection strategy.

My recommendation is a four-part plan that can help lock in the expected returns you want, while also protecting your cash from the ravages of inflation. Let’s take a close look at each of the four elements of this strategy:

  • First, protect your cash with Treasury Inflation Protected Securities (TIPs). Even though the trillions of dollars the Fed has injected into the system seem to be having some effect on the critically ill patient the U.S. central bank is trying to fix, we’re likely to pay a terrible price in the future. Forget the hyperinflation scenario so many people are hyping at the moment. While that’s certainly possible, it’s not probable. However, what is likely is a dramatic realignment of the dollar and a general increase in worldwide living expenses.

If you’re based in the United States and have mostly U.S. assets, you may want to consider something as simple as the iShares Barclays TIPS Bond Fund (NYSE: TIP) to offset this risk. The TIP portfolio is chocked full of inflation-indexed securities, but it also offers a healthy 7.46% yield. If you’ve got international exposure, you may also want to consider the SPDR DB International Government Inflation Protected Bond ETF (NYSE: WIP). It’s a collection of internationally diversified government inflation indexed bonds that provides similar protection. Make sure you talk with your tax advisor about both, though. Depending on your tax situation, you may find that because of the tax liability on inflation-related accretion, these are generally best held in tax-exempt accounts.

  • Buy gold but don’t go crazy. Despite widespread belief to the contrary, gold has never been statistically proven as an inflation hedge. But the yellow metal has proven to be a great crisis hedge because of the 10:1 relationship between gold prices and bond coupon rates – which obviously are directly related to inflation. Over time, the two move in such a way that having $1 for every $9 in bond principal can help immunize the value of your bond portfolio.

So to the extent that you own gold, do so not because you expect it to rise sharply, but because it will offset the inflationary damage to your bonds. A good place to start is the SPDR Gold Trust (NYSE: GLD) because it’s tied directly to the underlying asset without the hassles or risks of direct personal storage associated with bullion.

  • Consider commodities. It’s too early to tell if the so-called “green shoots” that everybody is so excited about are little more than weeds. Therefore, it makes sense to concentrate on picking up resource-based investments. History shows that these things are less susceptible to downturns, but more importantly, rise at rates that far exceed inflation when a recovery begins in earnest.

I prefer companies like Kinder Morgan Energy Partners LP (NYSE: KMP) that are less dependent on the underlying cost of energy than they are on actual growth in demand. That way, if energy prices don’t take off immediately for reasons related to deflation or stagflation, those still will benefit from demand growth. It’s a fine point, but one that merits attention for serious investors. KMP, incidentally, yields an appealing 8.68% at the moment.

  • Short the dollar to hedge your bets still further. Not only is the government going to borrow nearly four times more than it did last year, but when you add the complete federal fiscal obligations into the picture, our government owes nearly $14 trillion. This makes the dollar, as legendary investor Jim Rogers put it, “a terribly flawed currency” that could fail at any time.

To ensure you’re at least partially protected, consider the PowerShares DB U.S. Dollar Index Bearish Fund (NYSE: UDN), which will rise as the dollar falls. It’s essentially one big dollar short against the European euro, the Japanese yen, the British pound sterling and the Norwegian kroner, among other currencies.
In closing, there is one additional point to consider. You rarely get a second chance to do anything, especially when it comes to investing. So act now before the markets make it cost-prohibitive to protect yourself. When the economic recovery gets here, you’ll be glad you did.

Pretty sound advice. I was just thinking about converting my 401k into TIPS today when I came across this article. The rest of the advice I’ve followed in some form or another. Instead of directly shorting the dollar, I’m long FXA, which is the CurrencyShares Australian Dollar ETF and EDD which is an ETF of short-term foreign government and corporate bonds.

Another way to SHORT the dollar is buy going LONG foreign currencies. Everbank has multiple CDs you can open in various currencies. They also have some neat products where the principle is guaranteed against loss – there is no free lunch – the interest is used to hedge against loss – but you do get any upside appreciation of the currency. Check out their Marketsafe BRIC CD. Also check out their free newsletter, the Daily Pfennig, which is a good source of unbiased global macroeconomic/monetary and currency information.

Previously I had mentioned several ways to invest for a recession or a major downturn in the US economy. In that post, I stated that one of the ways to hedge against the declining dollar (apart from my favorite method of buying gold) was investing in foreign currencies.

Several people emailed me asking how to buy foreign currencies.

A few were concerned that they would have to travel overseas and open a foreign bank account. Luckily, it isn’t so difficult. You have 3 choices.

1. Buy Currencyshares ETFs. You can choose between several currencies like Australian Dollar (Ticker: FXA), Swiss Franc (Ticker: FXF), Japanese Yen (Ticker: FXY), Euro (Ticker: FXE), etc. If you have a brokerage account, its as easy as buying stock. This is probably the easiest method. They also pay monthly dividends and are quite similar to buying a foreign currency CD.

2. Open on account with Everbank and invest in their foreign currencies CDs or directly open an account in a foreign currency.

3. Open on account with Interactive Brokers and directly buy foreign currency (this is probably the most hassle so you’re better off sticking with the top 2 methods).

If you’re interested in buying foreign stocks, the easiest way is to buy the ADRs (American Depository Receipts). However a lot of foreign stocks do not trade in the US as ADRs. A good way to play the foreign markets is to buy foreign ETFs. For example, if you’d like to buy blue chip dividend paying swiss companies, the Swiss Helvetia Fund (ticker: SWZ) is a great investment. (I also happen to like the Swiss Helvetia Gold Coins too!). If you think Singapore’s economy is doing well, you can buy the iShares Singapore Index ETF (ticker: EWS). Or if you like Brazil, you can buy the iShares Brazil Index (ticker: EWZ).

For a more comprehensive list of foreign ETFs check out How To Conquer The World For Fun & Profit. If you’re interested in learning more about currency trading or investing in foreign currencies, I strongly recommend Everbank’s free daily newsletter about the currency markets, the Daily Pfennig. It’s really good.