Tuesday, February 12, 2008

The Dollar is Falling! The Dollar is Falling!

“I do not think the future of the U.S. dollar is great, as long as we keep following the policies that are certain to weaken it over time.”
- Warren Buffet, WSJ 2/12/08
Not really chicken little, but I guess I am chicken a little. I am very sure that the dollar will fall precipitously in the near future. Investors just haven't realized this. Once they do realize it, every one will be dumping their dollar holdings, dumping treasuries, and wishing they had moved sooner. So why am I chicken? Because I haven't put my (lack of) money where my mouth is. So, the skeptic would say, "But Digital Irony, you have been right on so many things in the past, what have you done to position yourself to either reduce your losses or to profit from the dollar falling precipitously ?" I would reply, "a) I have no extra money, and b) I'm chicken."

So to you, faithful reader(s), I present six concrete strategies to bet (or hedge) on the fact that I am correct and that the dollar you all know and loved will become the ugly stepchild of the global currency market: (Thanks to Gil for some of these tips) [disclaimer: DI is for entertainment purposes only and should not be considered investment advice. If you are looking to make a million bucks, get an MBA from UofM. Or not.]

1) There's an ETF (exchange traded fund) that shorts the dollar index, the ticker is UDN. In general, ETFs are better than mutual funds because they are "dumb" investments. They don't require an educated person on the other side deciding where to place your money. ETFs blithely follow indexes such as the Dow Jones Industrial Average (a sucky index) or the S&P 500. ETFs have been shown to perform as good as or better than mutual funds. Oh, and as an aside, get out of hedge funds because the rumor is they will be collapsing soon.

2) If you don't want to bet against the dollar, but would prefer to bet for the other guys, there's another ETF that invests in a basket of G-10 currencies (euro, franc, pound, etc.) with the ticker DBV. In essence, option 1 and 2 have the same result, they are just different opportunities (price points) and risk levels (one vs. 10 currencies). Oh, and speaking of options, you can buy options for all of these two bets which increase your risk, but at the same time increase the possible return. You shouldn't touch options unless you know what you're doing, as you stand to lose your entire bet if things don't go exactly the way you planned them to go.

3) There's a fund FDPIX that is aptly called the falling dollar fund. It is a managed fund (booo), and has a $15,000 minimum investment (double booo). The price of this one goes up as the dollar price goes down.

4) Buy gold. Notice there's no ticker link. One reason why is because Gil didn't give me one. But the real reason I would buy gold is in order to hedge against and prepare for a dollar collapse (God forbid) and not just the dollar falling in price. The price of gold has risen too much now (IMHO) for it to be an investment play on the dollar, it should be used as a fallback against the dollar becoming worthless.

So how do you buy gold? Go to a gold store. Seriously. I would recommend buying U.S. minted gold coins at a coin store near you which charges the least of a premium above the spot price of gold (geek-speak for the market price of gold). Ask around at different for various prices. Oh, and pay cash (you can get better prices). You can purchase gold coins in under 1 ounce coins, but if you're jumping in, jump in to the one ounce range (it's ~$900 per ounce now). For the smaller investor (like me) you can pick up silver coins similarly, but there will be more of a premium above the spot price in silver for US minted coins, and additionally, finding U.S. minted coins is not as important (I think) in silver as it is in gold. The reason I recommend U.S. minted coins for your gold purchases, is that they are more widely recognized and can more readily be sold back into cash, if needed.

One last gold recommendation - store the gold coins at home (in a safe bolted to the floor or in your front pants pocket) and not in a safe-deposit box in the bank, because the reason you bought gold in the first place is to hedge against a dollar collapse, and if there is a collapse and a subsequent run on the banks, the bank branches will be physically closed and you will not have access to your safe-deposit boxes.

5) Directly invest in foreign currencies. Contact a financial advisor for practical details, but a safe way to get out of dollars is to open up a savings account in another country (say, Switzerland, or Luxembourg - that's where I hide my millions) and export your dollars into foreign currencies. I'm not sure on the logistics or tax implications, so if you like this idea, seek professional help.

This recommendation is a direct play - i.e., converting dollars you own into foreign currency that you will then own. I do NOT recommend playing the "ForEx" market which allows suckers to buy foreign currencies on margin. Never touch margin plays, ever. Unlike options mentioned above, with margin investments you can actually lose more than what you put in. Worst case scenario with options, you lose 100% of what you put in (invest $100, you lose $100). With margin accounts, you can lose much, much more than what you put in. Imagine putting up $100, then losing $10,000 and needing to come up with the money for repayment otherwise Guido will be showing up at your house with a baseball bat. Not fun.

6) My last recommendation is the most morbid, so take this one with many grains of salt (literally). Buy food. Stockpile essentials for living that we take for granted as being available in stores. The next step after a dollar collapse is an infrastructure collapse. We rely so heavily on infrastructure to deliver our peaches and milk to the grocery store, once the system starts to break down, life's essentials become scarce. So one investment often overlooked by investment professionals is to buy canned goods, flour, water, heating fuel, etc., and store them in your basement. Even if you think of it as a pure monetary investment it's a good one - food prices (wheat, corn, rice, etc.) have gone up significantly lately, so consider the money you're making in your basement.

Here is a quote by Richard Daughty:
"Gold is for optimists. I'm diversifying into canned goods."
In summary, if you'd like an investment play on the declining dollar, check out UDN, DBV, or FDPIX. If you want to play it safe, open a foreign savings account. If you're worried about more than a decline and think the dollar will collapse, buy physical gold. And lastly, invest in basic needs should life's essentials become scarce (or very expensive).

Thanks for reading! If you have any additional tips, please leave them in the comments.


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