Lately the dollar has been falling like a rock, down 11.8% to be exact. That means most imports
have just become more expensive by the same amount. It's important to realize what's happening
that the TV media isn't talking much about: How to profit from the dollar devaluation.
As the dollar declines in value, it's all about what it is declining against. If you've traveled
out of the country, you know what it's like to exchange out of dollars into foreign currency.
Depending on how strong or weak the dollar is against other currencies, you either get
a lot more in their currency (strong dollar) or a lot less in foreign currency (weak dollar).
If the dollar is weak, that makes imports more expensive, so our purchasing power is
declining. Things like food, clothing, and luxury imports become much more expensive.
The key to making money from a declining dollar is to get out of the dollar as currency
and either into tangible things like commodities or things priced in foreign currency
such as the foreign currency itself, or foreign stocks and bonds.
Here are the three ways to position yourself to profit from a declining dollar:
1) Foreign stocks/bonds. If you're invested in foreign stocks, exchange traded funds,
or bonds, as the dollar declines, that translates into a positive return when the currency
is exchanged back into dollars. For example, if the dollar declines 10%, that's a 10%
return for you. That's not even taking into account the foreign markets' performance. If the foreign
markets you're invested in rise by, say 5%, add that to the 10% currency gain and that's
a 15% total return. It's like being leveraged, but without the leverage of debt!
2) Commodities, especially oil, silver, and gold. Most commodities are priced in dollars,
yet they are real assets with prices that are driven by supply and demand. If their price
were based only on the dollar and the dollar declined, that would mean, for example, the
price of oil would decline. But oil is a limited resource that trades on the basis of supply
and demand. Therefore, the price of oil must rise when the dollar declines because given
the supply and demand stayed the same, the only thing that changed was the value of the
currency. Therefore, the price of oil must rise to compensate for the currency declining.
So the price of oil works pretty much inversely to the dollar. It's the same with other
commodities like agriculture - wheat, corn, cotton, coffee, etc. That's why we will see the
price of food rise if the dollar continues to decline. If there's a bad harvest or a frost on
crops, that will drive food prices even higher. For agriculture, I have two favorite ETFs,
symbol MOO and RJA, the Rogers Agriculture ETF.
Silver and gold work in the same way. If the dollar is in a downtrend, then the prices of
silver and gold will increase. What's happening is gold is currency, and the dollar is
actually declining against gold. That's one reason the gold and silver mining exchange
traded fund (ETF) with the symbol GDX, or the ETF for smaller mining companies (GDXJ)
known as "juniors", can be attractive. They are a diversified index of gold and silver mining
stocks and another way to leverage the declining dollar. If the cost to mine an ounce of gold
costs $400 and gold is selling for $1,000 an ounce, that's a $600 profit. If the price of gold rises
to $1,200 an ounce, it still costs $400 to mine an ounce, but now the profit is $800! So you have a
way for earnings, and hence the stock price, to increase from the decline in
the dollar.
3) Foreign Currencies. Foreign currencies generally rise inversely to the dollar. The trick
with choosing a foreign currency is to invest in countries that have strong economies like
Norway or Canada because they are fiscally sound and have small deficits or even
surpluses. There are ETF's that you can invest in by country. One example would be the
Australian currency ETF, symbol FXA. There, you're getting the currency and the
fact the country is rich in natural resources/commodities both working in your favor.
A country without a large trade deficit, that has fiscal responsibility, will likely have
a strong currency.
The dollar has dropped a lot in the last month and I believe longer term, it will decline much further because of the money printing by the government. Every additional dollar printed makes the current ones less valuable (that's because now there's no limit to how much the government is printing). In the short run, I think we'll see the dollar spike upward which could cause a nasty stock market correction or even a crash. But longer term, the declining dollar is her to stay and you'd better prepare your portfolio for it to protect and grow your wealth. The last place you want to be is in cash (or savings accounts).
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