Best Currencies For Long-Term Cash Diversification

by: Trending Value


Countries with both low national debt and low corruption comprise a very small list.

Countries on this small list have some of the safest currencies for hedging against calamity.

Diversifying your home currency into this list of safe currencies will provide your cash holdings with extra protection.

Some people hold large cash positions as a part of their investment strategy. The reasons for this are numerous, such as fearing an overvalued stock market, avoiding bonds due to very low interest rates, or merely wishing to have dry powder available to exploit the inevitable value opportunity in the stock market.

Many people don't want to hold all of their money in the same currency. This is especially true for investors living in developing nations or those who are jittery about the high levels of government debt in the developed world.

Whatever percentage of your portfolio is represented by cash, my aim is to provide you a good list of high-quality currencies in which to diversify your cash holdings. This is not to speculate in foreign currency appreciation, but to hedge and diversify against adverse events in any single currency, including the United States dollar.

In my opinion, there are two main factors that make a fiat currency relatively safe compared to others. These are the issuing nations' public debt and their level of government corruption.

Corruption is a big issue with currency. As everybody knows, currency actually has no intrinsic value. It's accepted as a medium of exchange to the extent that a nation's citizens trust the currency and the government issuing it. Governments that are highly corrupt are almost always mistrusted by their citizens and, therefore, have the most unstable currencies.

National debt is also a big issue with currency. Governments with low amounts of debt have more options in dealing with adverse events. During times of trouble, these governments will be able to borrow additional money with less friction, whereas governments with pre-existing high debt levels usually have to resort to money printing and currency debasement. Low debt also demonstrates a tough stance on government fiscal responsibility.

I was able to determine public debt levels for most nations in the world by looking at the Central Intelligence Agency's World Factbook. For corruption levels, I was able to gauge these by using research provided by Transparency International, particularly the 2014 Corruption Perceptions Index.

Combining these two resources, I set my bar high for what constitutes low public debt and low corruption. My standard was to select currencies from governments with a 40% debt-to-GDP level or lower. Corruption levels are more subjective in what constitutes irresponsible behavior, but the nations from my list are all within the top 15 lowest corrupt countries in the world, according to the 2014 Corruption Perceptions Index.

My list of high-quality currencies derived from the research are as follows:

  • Norwegian Krone
  • Swedish Krona
  • Swiss Franc
  • Australian Dollar
  • New Zealand Dollar

These countries and their currencies are strong, in my opinion. They also have a reasonable geographic separation for purposes of diversifying across the planet. Keep in mind, this list assumes you are already holding some US dollars.

Let me caveat the findings. They are very generalized and far from perfect. There are a lot of other variables that are excluded from this article for purposes of brevity. For instance, the debt-to-GDP ratios in "The World Factbook" represent gross debt, rather than net debt. Net debt is an important consideration, as many countries have large sovereign wealth funds that bring the net debt back down considerably from the gross debt.

Several countries come to mind regarding sovereign wealth funds with low net debt or even positive equity, namely Norway, Singapore, Hong Kong, China, Qatar, Kuwait, Saudi Arabia, and the UAE. Norway is already included on my safe list. Of the others, I might consider adding Singapore, Qatar, Kuwait, and UAE currencies, but they're difficult for average investors to buy in the market. The others, Hong Kong, China, and Saudi Arabia have latent political risks and/or currency pegs that I dislike.

Let me briefly discuss my favorite currency, the Norwegian krone. Norway has a gross debt-to-GDP of roughly 30%. This is low. On the Corruption Perceptions Index, Norway ranks number five in the world for having low corruption. This is very, very respectable as Norway is a trustworthy, responsible, and high-quality country. It also has the largest sovereign wealth fund in the world, hovering around US$900 billion in total value. Taking its gross debt and subtracting the value of its sovereign wealth fund, I am getting an equity surplus of over 100% of Norway's annual GDP. This means Norway's government has the strongest financial footing in the world. With the krone's drastic decline in value against the US dollar since early 2013, I believe now is a good time to switch some of your currency into the krone.

Notice that my safe list does not include the currencies of the United States, Japan, the UK, or the Eurozone. Mostly, this is due to the high debt levels of these countries.

There are many respectable countries in the European Union with low corruption and debt, such as Finland and Denmark. The problem with Finland is that their currency is the euro, which has risks involving several less responsible members of the Eurozone. The Danish krone is a respectable currency but more difficult to buy as a small individual investor, as I can't even purchase it within my FOREX account. If you have access to purchasing Danish krones, however, you could consider adding it to the safe list.

If you are a citizen of the United States, the UK, Japan, or the Eurozone, I do not think you should switch all of your money into my safe list. You should obviously keep a substantial amount of your savings in your home currency in the event your currency happens to appreciate against others. I do, however, think you should diversify somewhat.

Forex accounts are generally the best places to hold foreign currencies. However, these accounts generally require purchases in blocks of ten thousand US dollars. For many investors, this is not feasible. Luckily, many of the currencies can be purchased with exchange-traded funds that hold the currencies on your behalf. They can all be purchased in blocks of roughly one hundred US dollars.

Here is a list of existing currency ETFs:

  • CurrencyShares Swiss Franc Trust ETF (NYSE:FXF)
  • CurrencyShares Australian Dollar Trust ETF (NYSE:FXA)
  • CurrencyShares Swedish Krona Trust ETF (NYSE:FXS)

Unfortunately, the Norwegian krone and New Zealand dollar ETFs don't exist, but some are presently being put together for a future date:

  • iShares Norwegian Krone ETF (Pending:NOKS) (pending)
  • iShares New Zealand Dollar ETF (Pending:NZDS) (pending)

Owning these currencies, along with your own national currency, should provide adequate currency diversification into some of the most responsible and financially strong countries in the world.

Disclosure: I am/we are long FXF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I primarily hold my currencies through a FOREX account, rather than ETFs. My current position in currencies is allocated as follows: 33% USD, 15% CHF, 22% NOK, 15% AUD, 8% NZD, 7% CAD.