What Currency Is Best for Holding Cash?

In a recession cash is king, but which currency should you hold? As investors begin to worry about the size of global bailout and stimulus packages and their longer term implications for currency values, this is a valid question and deserves a serious answer.

Short term I favor the US dollar, mainly because I expect a further sell-off in global capital markets, and as we found last autumn when markets sell-off then investors cash in their assets for US dollars. It is an automatic effect as dollars are what you get when you sell, and the selling boosts demand for dollars, at least temporarily.

The problem is that you do not need to be a rocket scientist from a hedge fund to see that the huge expansion of the global money supply now in progress by governments is going to cause inflation and devalue money. It will take time because in a recession people save their cash but when they start to spend it the inflation is inevitable.

Inflation

Central banks know this and are happy to see inflation melt away the burden of debt which has become intolerable. Never mind that savers lose their shirts. Then the whole up cycle can start again. But anybody holding cash will see its value seriously eroded.

We all know this happens overtime anyhow. As a student I could live comfortably on $6,000 a year in 1980 (admittedly we had many more hidden subsidies for students then), how far would that money go today?

So the question is whether switching out of the dollar into another currency at some point in the future will counter inflation? It is a tough call as in a global recession there is a competitive devaluation going on and the US dollar has been doing comparatively well in the past few months.

Personally I hold UAE dirhams - which are dollar linked - for the high rate of interest on deposit accounts, combined with instant convertibility due to free exchange policies (which were not even revoked in the First Gulf War). There is also the commitment to a single Gulf currency by 2010 which offers the prospect of a significant revaluation in the near future, although I am not speculating on that.

China

Otherwise it is a tough to go anti-dollar right now. The yuan is one idea, and I certainly think Chinese stocks will be a very good buy at some point in the near term as there will be significant upside both for the currency and the equities.

But the yen and the euro are facing serious recessions, and longer term should lose out in value to lower cost locations like China, or resource rich areas like the Persian Gulf. Recessions do have a habit of accelerating obvious trends.

However, the currency of choice is surely to go back to gold and silver as a defense against paper currencies and the nasty habit of governments to print money in difficult times. There is a worry over volatility with precious metals but then currencies have hardly been very stable recently, and actually a good deal more volatile than gold.

Certainly if you have a large cash position you should consider holding up to half of it in gold and silver and related assets as a hedge against currency devaluation which looks inevitable, and why not protect against an enemy you know is coming?

Comments

[bosun.j:]

Jim Rogers has allot of his money in Yuan and has stated every time a camera is put in his face that he's methodically reducing his dollar holdings. All my dollar renumeration is converted within hours.

Jan 13 07:59 AM

[GMiki1:]

Dollars pay the bills if you live in the U.S., but otherwise, I wouldn't hold dollars. Where you stash your holdings depends on your timeframe as well.

Jan 13 11:22 AM

[Larry House:]

There are times I am tempted to put every investment $ I have in gold. I have no confidence in our dear green back. On the other hand, as mentioned before, $$ are necessary to conduct business in this country, so it makes sense to hold $ in an emergency fund. Beyond one's reasonable cash needs, I think gold and silver are fine. It is a bit difficult for the average person to hold foreign currency.

Jan 13 03:18 PM

[Conan the B...:]

Chug into either Mexico or Canada, open a bank account, Internet wire transfers thereafter.

You can open a subaccount to handle conversion into another currency. As long as the account is less than $10K, you do not have to report it to the Treasury.

If $10K or above you MUST report it but as long as it is not interest bearing, there are no taxable consequences.

At least, this is what I've heard.

Jan 13 04:07 PM

[Conan the B...:]

If the US is really going to recover first, then the USD will remain strong. If it looks like some other country will lead the way, whether the USD goes down or not will depend on that country's impact on the rest of the world.

Meanwhile, as Everyone prints more, no one has ascendency more than the World's Reserve Currency.

IMHO

Jan 13 04:13 PM

[bosun.j:]

Difficult? Any major American metropolitan area will have a commercial bank that has a foreign exchange desk and will have as much of the yen, pounds, euro, yuan as an average purchaser will be able to buy in a single transaction. If you live in Hootervile (why?) your local bank can order the currency for you. Not so difficult.

Yes when you must live in America (why?) you need a current (checking) account to clear transactions. However, you can reduce your dollar exposure by opening an account denominated in pounds or euro at Abbey International (or others) over the internet and international post (mail). You can use the visa debit card issued from that account to pay for goods and services. You'll pay a 2.5% exchange rate on each transaction but many view that akin to an insurance policy. The problem with any account in any fiat currency is the loss of purchasing power if the currency is debased.

Buy your gold at your local coin dealer or jewelry supply store. Buy Canadian Maple Leafs, Chinese Pandas or anything other than Eagles as the later come in both 96.5% and 99.9% making it possible to cheat yourself if you can't determine the difference.

Whatever you decide, good luck!


On Jan 13 03:18 PM Larry House wrote:

> There are times I am tempted to put every investment $ I have in
> gold. I have no confidence in our dear green back. On the other
> hand, as mentioned before, $$ are necessary to conduct business in
> this country, so it makes sense to hold $ in an emergency fund.
> Beyond one's reasonable cash needs, I think gold and silver are fine.
> It is a bit difficult for the average person to hold foreign currency.

Jan 14 01:03 AM

[henarl:]

If you want to invest (or speculate) in other currencies, try Everbank.

Jan 14 03:02 PM

[Gold Barron:]

I think a good diversification of foreign currencies, gold, and silver are the way to go.

Jan 15 01:46 AM