My Personal Currency Protection Plan

If you’ve been following the financial news, you’ll know that global stock markets have been tanking this week.

The main driver for this is the fear that bond markets will shut out Italy and Spain…just as they shut out Greece, Ireland and Portugal.

When bond investors think there is a high risk that a state won’t be able to honor its debt commitments they charge a higher rate of interest on new loans.

This higher rate of interest compensates them for the risk of a default (which would leave bond investors hanging out to dry).

And if investors think the risk of a default is really high, they will charge a rate of interest that a national government simply can’t afford.

At this point, a government has limited options.

1) It can rely on its own financial reserves to fund spending, if it has any. China might have sufficient financial reserves for this kind of thing. Spain and Italy don’t.

2) It can default – meaning it simply stops paying back the interest on its debt. At this point, it is unlikely to find anyone willing to lend it new funds.

3) It can seek a rescue to cover its spending requirements until it can go back to the markets and pay a more affordable interest rate on new loans.

The “Hail Mary Pass” Option Won’t Work

Right now, Greece, Portugal and Ireland have been forced to go down the financial rescue route.

In football this is what’s known as a “Hail Mary pass.”

In desperation a quarterback will sometimes throw a long forward pass in the hope that a teammate will catch it at the other end. They rarely result in a score.

The problem for Europe is that Spain and Italy are too big to bailout. Greece, Ireland and Portugal have small economies. But Italy’s economy is roughly the same size as Brazil’s. And Spain’s economy is similar in size to Russia’s.

So unless someone comes up with another alternative…and come up with one fast…default may be the only answer.

Here’s what I’m doing with my money to protect myself…

4 Currencies to Own Now

Like most of you, I earn dollars. But unlike most of you, I spend mostly euro. Right now, I’m in Spain. But I spend a part of the year in Berlin. So, I simply can’t avoid holding some cash in euro.

I think of this as “pay the bills” kind of cash. And given the level of uncertainly surrounding the euro, I keep this “pay the bills” cash to the absolute minimum.

The rest of my cash I split between U.S. dollars, Canadian dollars, Swiss francs and gold. (And, yes, I view gold as a currency. I’ll explain why in just a moment.)

I hold dollars because although I believe the dollar is on long-term trend downward, I also believe it is due a sizable bounce or two along the way.

The world is overly bearish on the near-term prospects of the dollar. So I am bullish. Simple as that. In a year’s time I may not hold so much cash in dollars. But for now I think it’s a good bet.

I hold Canadian dollars because the Canadian economy is a big commodities exporter and, over time, I believe commodities are going to make investors a lot of money. When commodities rise in price, so will the exchange value of the Canadian dollar.

The Swiss franc isn’t a perfect currency. But the Swiss run a more prudent national balance sheet than most other countries. In a race to the bottom for currencies, the Swiss franc will be one of the last to reach the finish line.

Gold – Unique Among Currencies

That just leaves gold…

Gold is unique among currencies, because it cannot be printed up by trigger-happy central banks. But it’s a currency nevertheless. It’s what investors turn to when paper money goes bad.

In the end, all fiat currencies get devalued. Because they are instruments of governments backed by nothing but government promises.

Gold is different. And the reason an ounce of gold is selling for north of $1,500 is testament to this.

There are a number of different ways you can put your own currency protection plan in place.

You can track the performance of the Canadian dollar, the Swiss franc and gold by way of exchange traded funds, such as the CurrencyShares Canadian Dollar Trust (NYSE:FXC), the CurrencyShares Swiss Franc Trust (NYSE:FXF) and the ETFS Gold Trust (NYSE:SGOL).

Alternatively, in the case of the Canadian dollar and the Swiss franc, you can buy a World Currency CD with EverBank.

The minimum opening balance for these accounts is $10,000. And the minimum term is three months.