Charles Goyette wrote in his book The Dollar Meltdown: Surviving the
Impending Currency Crisis with Gold, Oil, and Other Unconventional
Investments:
Alchemists of antiquity, who spent their entire lives trying but were
never able to "goldify the lead," would have been in awe at the way
modern central bankers "monetize the debt." This process of turning
debt into money is truly an act of central banking wizardry.
The government runs deficits by spending more money than it has. The
government's debts are then used as collateral for the creation of new
money... The greater the government's debt, the more money the Fed can
create.
And the less your dollar is worth...
Because our dollar isn't backed by anything except debt, the long-term
health of the greenback doesn't look good.
And yet, conservative investors are holding at least some portion of their
portfolio in cash. Economist Harry Browne's Permanent Portfolio suggests
holding 25% of your entire portfolio in cash. Renowned analyst Ian Gordon,
founder of Longwave Analytics, says that in economic winters, investors
should hold gold and cash.
Even we here at Bonner & Partners recommend holding some cash.
But not all fiat currencies are created equal, and today's marketplace
will give you a lot of opportunities to hold something other than dollars in
your portfolio.
Whether you have a forex account, invest in currency ETFs, buy CDs that
track foreign currencies or hold an actual account offshore in another
currency, you're giving your portfolio the chance to make that
"cash" work for you.
International currencies have been experiencing surprising growth.
Countries that ran current account deficits 20 years ago now have trade
surpluses and have built up sizable foreign exchange reserves. Take Brazil,
for example. This country floated its currency,
and it has appreciated dramatically against the U.S. dollar.
Here's how to hold cash in today's economy: Find economies with these four
principles.
Must have resources. Resource-rich countries tend to have
stronger economies. Commodities are one of the few areas where the long-term
fundamentals are "unimpaired" in terms of demand and the ability to
bounce back.
Countries with significant commodity reserves raked in the dough, and socked
it away in massive foreign exchange
reserves.
Must have strong financial sector. In the 21st century,
new financial hubs will rise and old financial hubs will fall. The world's
center of gravity will shift toward growth markets as new wealth is created
and dynamic growth unfolds.
With that dynamism comes open markets. A strong financial sector will help
a country profit from this.
Must have political and economic freedoms. Each year, the
Heritage Foundation and the Wall Street Journal compile a ranking of
the world's freest countries, in terms of political and economic freedom.
The amount of freedom an economy has to be creative and innovative goes a
long way to help countries and markets adjust to financial crises.
Must have cash. In a world where debt is a burden, cash
is king. While the countries you want to look for can be considered
"rich" in many unconventional ways, they should be rich in the old
fashioned way too.
Holding hundreds of billions in cash means the ability to address
financial crises without going into debt. This leads to attractive currencies
and overall economic health.
One of the best performing currencies in the recent years has been the
Australian dollar. Look at this chart:
View larger image
Just look at the strong move off the bottom during the financial crisis.
Since October 2008, the Aussie dollar has gained more than 70% against the
greenback, and it's precisely because it's resource-rich, holds large amounts
of cash in foreign reserves, and has a very strong financial sector.
The CurrencyShares Australian Dollar Trust (FXA:NYSE)
tracks the performance of the Aussie dollar and is easily tradable on the
NYSE.
Let's face it; the dollar is neither attractive nor healthy. Holding cash
may be something you do while holding your nose, but it doesn't have to be.
Happy Investing,
Sara
