How to Profit on a Huge Currency Trend

This week you’ve heard about two ways to profit from the explosive growth in overseas markets.

1) Buy stocks in fast-growing overseas markets.

2) Buy the natural resources needed to fuel overseas growth (oil, farmland, food commodities, gas, copper, etc).

There’s a third important element to a global investing strategy – making sure you are diversified outside of the U.S. dollar.

This is crucially important, of course, if your earnings and savings are in U.S. dollars.

For those of you who are new to International Living Investor, let me quickly walk you through the reasons why diversifying your savings out of the U.S. dollar is important. Then I’ll talk about the best ways to do this.

Let’s get one thing cleared up straight away: I do not believe the dollar is going to suddenly collapse. Frankly, people who make this argument don’t know what they’re talking about.

The dollar is the world’s most widely held and most liquid currency. For it to collapse, investors would have to move their capital from the dollar and dollar-denominated assets such as government bonds to another suitable liquid currency.

For the dollar to collapse, in other words, there needs to be an alternative to the dollar. And right now there is none. The closest contenders are the euro and the Japanese yen.

Does the yen have better fundamentals than the dollar, with a debt-to-GDP ratio in Japan of 230%? Does the euro have better fundamentals than the dollar, with outright bankruptcy in Greece, Ireland and Portugal and growing worries over Spain and Italy? I don’t think so.

The Chinese currency, the yuan (also known as the renminbi) is another currency people mention as a possible alternative to the dollar.

But the problem with the yuan is that the Chinese government keeps its exchange value artificially low – the “currency manipulation” you often hear members of the Congress foam about on TV.

China does this by selling the yuan and buying lots of dollars instead to hold as foreign currency reserves – essentially “pegging” the yuan’s value to the dollar instead of allowing it to move freely in foreign exchange markets.

So right now, the Chinese wouldn’t allow capital to flow freely into the yuan even if investors thought it was a better alternative to the dollar.

That said, I take a long-term bearish view of the buck, especially if the Obama administration continues to sidestep the need for spending cuts and budget reform. Which, unfortunately, it seems intent on doing.

There are other factors that make a weaker dollar look likely:

1) The Fed – America’s central bank is openly devaluing the dollar by keeping interest rates near zero and by trying to frighten investors out of the dollar through its so-called “quantitative easing programs.” Through these, the Fed creates dollars out of thin air and uses them to buy Treasury bonds from U.S. commercial banks. If banks start lending these new dollars out, investors know that inflation will follow and that the value of the buck will fall.

2) Washington – Backing the Fed’s efforts to drive the dollar lower is Washington. America’s politicians understand that the national debt load is so ludicrously large – over $14.3 trillion – that the country has no chance of paying it back unless it can do so using a weaker dollar. (To give you an idea of how absurdly large the U.S. debt load is, in $1,000 bills it would be 900 meters tall.)

3) A weak economy – If the U.S. economy wasn’t so weak, these two factors wouldn’t be so bad. In a strong economy, Ben Bernanke wouldn’t be so desperate to ‘stimulate’ and the country would have some chance of growing its way out of its debt. But unfortunately that’s not the case. As long as the U.S. economy stays weak, and there is an activist Fed and an administration in Washington unwilling to take tough decisions on budget reform, a weak dollar is here to stay.

4) Pressure from the emerging markets – As the world’s emerging economies grow in wealth, so will the role of their currencies in international trade. The U.S. dollar will go from being the world’s reserve currency to being one of a number of reserve currencies (which will likely take the form of a reserve currency “basket”).

So, what can you do about it.

Well, you might be surprised, but my number one recommendation is to buy gold.

Gold is the world’s only honest currency. No central banker can create it out of thin air. And no government can inflate away its value.

Gold is also what I call one of the four “anti-dollar” currencies, along with the Australian dollar, the Canadian dollar and the Swiss franc. When the dollar falls, these four “anti-dollars” tend to rise.

My favorite way of buying these “anti dollar” currencies is through exchange-traded funds (ETFs). You can buy these easily through your U.S. broker. And you don’t have to bother with opening a foreign exchange account.

The names and ticker symbols are: the ETFS Physical Swiss Gold Trust (NYSE:SGOL), the CurrencyShares Australian Dollar Trust (NYSE:FXA), theCurrencyShares Canadian Dollar Trust (NYSE:FXC), the CurrencyShares Swiss Franc Trust (NSYE:FXF).

The decline of the U.S. dollar is going to be the currency trend over the next decade and beyond. Owning “anti-dollar” currencies is the best way to protect yourself.