Protect Your Purchasing Power And Preserve Wealth

Sep. 06, 2011 10:46 AM ETGLD, DGP, UGL, UDN6 Comments
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Turtle Management

It’s tough to have a long-term view on anything in this market given the volatile environment we are currently in. The future of the global economy and the stock market is directly tied to the choices that politicians in both the United States and Europe make over the next few weeks, months, even years. Despite uncertainty in the market, there are a few things that the average investor can have a long-term view on. In addition, there are a few things you should consider doing in order to protect your wealth in the coming years.

Protect Your Purchasing Power

Trade: Diversify your USD exposure by buying other currencies, or bet against the dollar relative to a basket of currencies via an ETF such as UDN.
Thesis: Mark Twain said it best: “I never let my schooling interfere with my education.” Anyone who has taken Finance 101 in college has learned about the importance of diversification. Anyone with a dose of common sense was soon thereafter able to determine that diversification is only smart to a point. Owning thirty stocks in a portfolio is reckless at best and a recipe for disaster at worst. If 2008 taught us anything it was that in times of duress correlations go to 1, thus rendering diversification useless. On the contrary, if you place all of your money in one stock, fund, bond, or in this case currency, you could also be in for a world of pain. No one can follow 30+ companies to the extent they need to be researched and covered in order to make great trades, but it can be done with 3 to 10.

Most people would readily agree that being exposed to only one investment is extremely risky especially over an extended period of time. That idea is the essential basis for the aforementioned trades. Most people reading this article are paid in U.S. dollars. It is no secret that the dollar has been declining in value over the past decade and even more so recently. Over the last few years wages paid to people like you and me have remained somewhat stagnant while inflation in terms of energy and food prices has risen.

As a result of increasing food and energy prices, people in general have been forced to use a higher percentage of their income on essential items needed for survival instead of making discretionary purchases. It’s hard to buy a boat when you have to pay $4 per gallon on gas just to get to work. This is worrisome not only because it is proof that corporate earnings are high at the moment and helps make a case for a double dip recession, but also because the value that each individual dollar that you own has dropped. What does this have to do with this trade?

If each dollar you make buys you less than it did previously and the number of dollars you make does not increase at a rate proportionate with your expenses your purchasing power drops. As the government prints money and defaults on its debt (yes printing money and devaluing currency is technically defaulting. What is the difference if you lend someone $100 and they only give you $50 back or they give you the full $100, but now that $100 only buys what $50 did when you first lent it out?) to deal with our unbelievably large and growing deficit and debt levels, the value of each dollar decreases. Printing money supports stock and housing prices, but most poor and middle class people own little of either. Savers are punished (essentially taxed) as the FED keeps interest rates low while inflation steadily creeps up. Inflation is a tax on the poor and middle class. Without even being exposed to the market you are effectively losing money. Why would you want to stay fully invested in the USD is the real question? Diversify your exposure away from this weakening currency. Hedge against the risk that the dollar continues to slide and your wages do not increase as fast as they should. The economics here are simple. When the supply of something goes up, the value of each unit of supply (in this case each dollar) goes down. Protect yourself by betting against the currency in which you are paid or purchase multiple currencies. The Australian Dollar and Canadian Dollar are great places to look as their central banks are not increasing the supply of those dollars like we are. Stay away from the Swiss Franc for other reasons I will not bore you with and most certainly avoid the Euro for the foreseeable future. I shouldn’t even have to explain that one. The New Zealand Dollar is another potentially strong investment and hedge.
Bottom Line: You wouldn’t buy $50,000 of one stock if you only had $50,000 to invest. Don’t bet the bank on the USD either.
Another way to hedge:
Trade: Buy gold. You can buy the SPDR Gold Trust ETF (GLD) or the actual thing. Stay away from options here as they are currently expensive from an implied volatility standpoint and this is a long-term bet against the dollar among other things.
Thesis: Gold is not a bubble. As long as central banks try to diversify away from the dollar due to its value depreciating gold is good. Mexico bought approximately 98 tons of gold last quarter alone. South Korea was a buyer for the first time in approximately 13 years, purchasing 25 tons. Thailand and Russia are also buyers. Chavez wants the UK to give him his 80 tons of gold or so back. which it will have to go in to the market to buy. It does not matter what the little people on Yahoo Finance or CNBC do. Like everything that is sold in any market, if there is more demand than supply, prices will go up. The only question you have to be concerned with is; are the big boys buying still?
Gold is a hedge against currency risk for emerging market central banks that hold dollars as their primary reserve currency. The value of the dollar has been steadily declining over the past decade. Our enormous ballooning debt and deficit mean that we will have to raise taxes, default, and or print money (technical default) which will further drive down the value of the USD relative to other currencies. Throughout history gold has always been perceived (key word) as having value and therefore it does despite the fact that it is nothing more than a shiny yellow rock. I do not care if gold loses or gains 10% in the next week or month for that matter. The trend for gold is to go higher on everything from currency fears to debt and European uncertainty. I have not taken the time to analyze the miners so I will not comment as to whether or not they are trading at a discount or premium to the spot price of gold. I have been long the PowerShares DB Gold Double Long ETN (DGP) since June. Consider GLD, DGP, ProShares Ultra Gold ETF (UGL), or actual gold that you can touch. Research ETNs and how they work before you put your life savings into levered products. If you are not comfortable with levered products stick with GLD or the real thing. Bottom Line: If central banks like gold, you should too.
Disclosure: I am long DGP.

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