As the crisis in Europe continues to take its toll on the markets and bank borrowing costs rise, a nation’s debt and currency debasement should be of much concern.
Most recently, a study indicated that the U.S. national debt has ballooned nearly 12 fold over the last 30 years. Additionally, over this same time span the ratio of debt to GDP has gone from nearly one-third to 85%. During this time of exploded debt, GDP has only expanded 5.3 times, indicating that debt is growing at twice as fast as the U.S. economy. Similar trends have been seen in Europe, in particularly Greece, Spain and Portugal.
Some concerns of this exponential growth in debt include hyperinflation - as a result of printing more currency, a decline in the value of a nation’s currency - better known as currency debasement, and increased costs of borrowing - which make it difficult to chip away at deficits.
Some experts suggest that this trend in the developing world, in particularly the United States, is likely to continue as nations have become accustomed to borrowing extraordinary amounts of money and printing extra currency to stay afloat. If this is the case, then inflation will be inevitable and currency values will diminish.
Some possible ways to protect against currency debasement and increases in inflation include the following:
Traditionally, gold trades inversely to the U.S. dollar and has long been a traditional hedge against inflation and currency weakness. Gold can be played through the SPDR Gold Trust (NYSEARCA:GLD), which is backed by physical gold. GLD closed at $117.36 on Tuesday.
In general, as the U.S. dollar losses ground, commodities reap the benefits. Additionally, the world is growing and demand for commodities is likely to follow. Some broad based commodity plays include the iShares S&P GSCI Commodity-Indexed Trust (NYSEARCA:GSG) and the PowerShares DB Commodity Indexed Tracking Report (NYSEARCA:DBC), which includes exposure to gasoline, crude oil, sugar, copper and other sought after commodities. GSG and DBC closed at $26.53 and $21.29 on Tuesday, respectively.
In particular, Brazil and India are expected to see financial strength, which translates to a stronger currency. Brazil continues to be flush with resources that are in high global demand and India is seeing increases in business investment, strong capital markets and boosts in consumer confidence. Brazil can be accessed through the WisdonTree Dreyfus Brazilian Real (NYSEARCA:BZF) and India can be played through the WisdomTree India Earnings (NYSEARCA:EPI), which closed at $25.57 and $20.66 on Tuesday, respectively. For exposure to both these nations, one could take a look at the iShares MSCI BRIC Index (NYSEARCA:BKF), which allocates nearly 49% of its assets to Brazil and India or the Claymore/BNY Mellon BRIC ETF (NYSEARCA:EEB), which boasts nearly 67% of its assets to these two nations. BKF and EEB closed at $39.21 and $36.33 respectively, on Tuesday.
The key in fixed income is sticking to short-term investment tools. Interest rates are more likely than not to increase sometime in the near future and by utilizing short-term bonds, one limits the risk of a spike in interest rates. A good play here is the iShares Barclays 1-3 Year Treasury Bond (NYSEARCA:SHY), which holds 50 different U.S. Treasury Notes all expected to mature sometime in 2012. Another notable option in the fixed income world is the iShares Barclays TIPS Bond (NYSEARCA:TIP), which is a Treasury Inflation-Protected Security whose principal and interest payments grow with inflation. SHY and TIP closed at $83.81 and $105.70 on Tuesday, respectively.
Although currency debasement and inflation remain threats, it is equally important to keep in mind the inherent risks that are involved in investing. A good way to protect against these risks is through the implementation of an exit strategy which triggers price points at which an upward trend could potentially be coming to an end.
According to our latest data, an upward trend in the mentioned equities could come to an end at the following price points: GLD at $114.13; GSG at$26.42; DBC at $21.15; BZF at $24.03; EPI at $19.73; BKF at $37.55; EEB at $34.49; SHY at $83.48; TIP at $104.73. These price points change on a daily basis as market conditions fluctuate.
Disclosure: Long GLD and BZF