The U.S. dollar doesn't have a lot of fans. In fact, outside of short-term traders, it's nearly impossible to find an analyst with a positive thing to say about the greenback.
The negative prognosis is not without good reason. When the world's economic output is expanding, currencies of other nations have strengthened against the U.S. dollar. And when the world's economies are sputtering, leaders have questioned the dollar's status as a viable reserve currency.
Yet most investors seemed ill-prepared for one of the only investments that yielded a positive return in 2008; that is, while the S&P 500 dropped -38% in value, PowerShares DB U.S. Dollar Bullish (UUP) garnered 4.2%.
Indeed, the downward trend for the greenback has resumed in 2009. For the time being, PowerShares DB U.S. Dollar Bullish (UUP) is below its shorter-term 50-day moving average as well as its longer-term 200-day moving average.
Yet, by the same token, it's down only -2.5% on the year. That's actually better than U.S. stocks in the S&P 500, currently off about -2.7% as I type.
In complete contrast to the outspoken hatred for the U.S. dollar, there's a hard asset love affair with gold. The yellow metal wins universal praise for its historical ability to fend off inflation and dollar devaluation, while simultaneously earning high marks for pure desirability. About the only thing that gold isn't credited with (so far) is a capacity for curing cancer.
You don't have to look far for fans of gold, often referred to as "gold bugs." Buy gold via SPDR Gold Shares (GLD) because China is rapidly acquiring resources across the commodity board. Buy GLD for its technical strength above moving averages. Buy GLD because worldwide flows into gold funds continue to break records. Buy GLD as a hedge against hyperinflation. And, of course, buy GLD because the U.S. dollar is doomed.
In truth, GLD does appear to be a venerable contender for a portion of a well-diversified portfolio. Yet in a "black swan/perfect storm catastrophe" like the 3 month, systemic breakdown of 2008 (September through November), GLD dropped an astonishing -30%. PowerShares DB U.S. Dollar Bullish (UUP) soared 20%.
If economies are going to sputter for a longer period than many had hoped, as many in the G-8 are now suggesting, inflation may take its sweet time before rearing its ugly head. What's more, gold hasn't shown a definitive ability to break the psychological $1000 per ounce value, let alone approach inflation-adjusted highs of $2000 per ounce. And remember, nearly all commodities hit inflation-adjusted highs in July 2008 except for gold.
GLD is indeed a strong hedge against the dollar's UUP. Yet what if you were looking to reduce the risk of owning one versus the other? Could you achieve a better risk-reward outcome by owning both?
Indeed, many portfolio constructionists endeavor to hold assets with a slight negative correlation of -0.40%. That's the 1-year relationship in directionality between PowerShares DB U.S. Dollar Bullish (UUP) and SPDR Gold Shares (GLD). So what if you had actually held both during the course of the bear market that began October, 2007?
Granted, if you held GLD all by itself from bear market inception through the present day, a 22% total return could have been yours. Yet that would not have come without enormous volatility of a top-to-bottom decline of 30%, with little more than faith in the metal during its steep decline.
In contrast, hedging gold's potential volatility with a low-volatility, negatively correlated investment produced a sleep-better-at-night 11% aggregate return. It may not be as crazy as it sounds to hold the beloved gold and the dreaded U.S. dollar together... to reduce overall risk, to hedge against a black swan event and to account for the small possibility that the U.S. dollar actually strengthens.
Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.
