How to Invest Like China

|
Includes: BHP, ERF, FXA, FXB, FXE, FXF, FXY, GDX, GLD, IRS, KMP, RIO, TYY, UDN
by: Investor Nirav

In the last post we saw that China was slowly diversifying away from its usual investments in US Treasury Bonds and investing in hard assets, natural resources and maybe other currencies.

There is probably a very good reason why the world’s second largest holder of US dollars is weaning itself away from bonds issued by the world’s largest debtor nation. If you believe the Chinese know what they are doing, it might make sense to imitate their investment strategy.

While you don’t need to buy $80 billion worth of gold, you might do well buying gold equal to at least 5% of your net worth. Gold is not an investment in itself but a historic store of value. Regardless what anyone tells you, the US Dollar is not a store of value. During times when governments print money hand-over-fist, gold typically does well. In fact, over the past 10 years, gold has appreciated against every single currency.

You can either buy the physical gold, a gold ETF like GLD, a gold mining stock ETF like [GDX], gold certificates or a custodial account. You can also buy silver and silver ETFs in a similar fashion. There was a recent Chinese news report recommending silver to Chinese investors since it's a better value than gold!

You can also exchange your US dollars directly for foreign currencies. Everbank currently has a Marketsafe BRIC CD, which invests in a basket of Brazilian Real, Russian Ruble, Indian Rupee and Chinese Remnimbi. This CD doesn’t pay any interest but the principle is protected against loss. But if you’d rather take a risk and earn some interest, Everbank has a slew of CD products in several European and Asian currencies.

Another option are the CurrencyShare ETFs for Australian Dollars (NYSEARCA:FXA), British Pounds (NYSEARCA:FXB), Swiss Francs (NYSEARCA:FXF), Japanese Yen (NYSEARCA:FXY) and Euros (NYSEARCA:FXE). Another ETF worth considering is UDN, an inverse US Dollar ETF, which is a basket of the above mentioned currencies. (However, inverse ETFs may not accurately follow the downward movement so you’re cautioned to do some research).

I do not recommend forex-trading as a means of hedging yourself against dollar devaluation. Forex trading is a highly leveraged, zero-sum speculation. In a zero-sum game, a participant can only win at the expense of another participant. In fact, it may be considerably less than zero-sum because your brokerage can run your stops (which it can see) and effectively trade against you.

If you are thinking of investing in currencies, definitely check out Everbank’s free newsletter, the Daily Pfenning. It provides a very informative (and entertaining) look at global economics and investing. Actually, you should subscribe if you do any sort of investing. Everbank also has a low-cost custodial account for gold and from time to time (whenever the price of gold drops dramatically) they offer a MarketSafe (which means principle-protected) Gold CD. Sign up for the newsletter and they’ll inform you whenever they come out with new products.

If you have a penchant for natural resources, you should look into Master Limited Partnerships (MLPs) like Tortoise Energy (NYSE:TYY) or KinderMorgan (NYSE:KMP). Both pay a juicy dividend that is considered a return of principle and thus non-taxable (although it does alter cost-basis). However both have appreciated significantly this year. Canadian Royalty Trusts like Enerplus Resources (NYSE:ERF) are also an option.

You can also buy natural resource stocks like Rio Tinto (RTP) or BHP Biliton (NYSE:BHP). China has been trying to buy multi-billion dollar stakes in companies like these and is currently unsuccesful. If you think that a day may come where Chinalco will be successful, you might want to get in before that happens.

IRSA International (NYSE:IRS) is an Argentinian company that trades on the ADRs. It owns farm land, resorts, hotels and shopping malls in prime locations. After decades of “quantitative easing” (another word for printing money) wreaked havoc on their economy and standard of living, Argentinians don’t trust banks or central bankers. They trust gold and farmland. The way the US economy is going, we too may come to that same conclusion. Just to be safe, I bought some of the stock. On the other hand, you might be better off buying farmland or a ranch for hunting. I’m pretty sure, buying farmland is next on China’s list!

Disclosure: I own ERF, TYY,FXA, IRS, Everbank MarketSafe Japanese REIT CD, GDX and physical gold/silver.