Diversify Your Money And Protect Against Currency Depreciation

Includes: FXA, FXC, FXF, GBB, UUP
by: Robert Hallberg

We are living in a world of depreciating currencies and the purchasing power of the money in your bank account is slowly dwindling away. And even though I am a huge advocate of gold, it is still necessary to keep some “dry powder” on hand. Having cash and being liquid gives you courage and it opens up opportunities to take advantage of bargains that may present themselves in a liquidity crunch.

However, some currencies are better than others and it’s important to diversify your holdings. Since the fiat currencies today are not backed by gold or any other commodities, the strength of a currency depends of the strength of that country’s economy. Favorable characteristics for a strong currency include, a positive balance of trade with other nations, positive real interest rates, and a stable monetary base, to name a few. Running a budget surplus and keeping a reasonable debt load also contributes to a sound economy.

The chart below compares a collection of fiat currencies against gold. They are all significantly down against gold over the last 10 years. The U.S. dollar (UUP) and the British pound (GBB) are among the worst performers.

(Click charts to expand)

The Swiss franc (FXF) and the Australian dollar (FXA) have been among the best performers, while the Canadian dollar (FXC) and Norwegian Krone has not been too far behind. However, Switzerland has recently announced that they will peg their currency to the Euro, which will limit its future viability.

The table shows different currencies and important characteristics contributing to a sound currency.

To limit your liabilities I suggest diversifying your currency holdings into the Australian dollar and the Norwegian Krone. Norway for example, is a major oil exporter and has a very strong trade surplus and a manageable debt load. Australia is also major commodity exporter and has a low debt-to-GDP ratio.

Although these currencies are far from perfect, they have stronger fundamentals than many other countries currencies and should depreciate less. Furthermore, if you live in the US, it may be practical to keep some money in the US dollar despite its poor performance. The US dollar is still the world’s reserve currency and will likely have a rally in the event of a liquidity crisis or panic.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.