Portfolio Protection Against the Collapse of the U.S. Dollar

Portfolio ProtectionWhen it comes to the state of U.S. politics and the economy, you can’t believe everything you read or hear.

Example 1: In 2003, President George W. Bush famously gave a speech aboard the aircraft carrier USS Abraham Lincoln, during which a banner behind him proclaimed, “Mission Accomplished.” It wasn’t then, and it still isn’t.

Example 2: Who can forget these wise words from former Federal Reserve Chairman Alan Greenspan in 2007: “The worse is over for the U.S. housing market, and there will be no economic spillover effects from the poor housing market.” It wasn’t then, and it still isn’t over.

Example 3: Here’s more dubious wisdom coming from the world of finance. Published in the pages of the Saudi Gazette, a January 28, 2013 article announced, “Global ‘economic crisis over,’ say Davos pundits.” Courtesy of Philly.com, a February 6, 2013 article headline proclaimed, “Financial crisis officially over, proceed into stocks with caution.” Again, it wasn’t then, and it still isn’t.

Why do some think the global crisis is over? Because the stock market is doing well. The Dow Jones index recently rose above 14,000 for the first time since October 2007. And the S&P 500 is trending near its all-time high. So, what more proof do you need? Well, for one, how about looking at those who are not liquid enough to participate in the stock market?

Frankly, I’m not sure how anyone can declare an end to the global economic crisis when the eurozone continues to report record unemployment and a bleak economic outlook. Here in America, the unemployment rate remains stubbornly higher and economic growth projections are anemic.

After three rounds of quantitative easing, the influx of $3.0 trillion into the U.S. economy was supposed to increase lending, create more jobs, and lower the unemployment rate. Instead, tight-fisted banks are sitting on a pile of cash, fewer jobs have been created, and the unemployment rate remains high.

When the financial crisis began in 2008, the U.S. national debt stood at $9.2 trillion. Based on the White House’s own figures, the national debt will reach $20.0 trillion by the end of this decade

While the extra dollars pumped into the economy were supposed to spur economic growth—they have had the reverse effect; they’re shrinking the buying power of each dollar, which is the driving force of inflation. Since July 2012, the U.S. dollar index has gone down almost six percent. As the U.S. dollar declines in value against other world currencies, goods imported into the U.S. become more expensive.

This is not lost on the majority of Americans, or on the state legislatures.

Across the country, fears and concerns are growing that the U.S. debt is out of control. And, thanks to the actions of the Federal Reserve, the U.S. monetary system could collapse through hyperinflation.

Virginia Representative Bob Marshall announced that he is proposing legislation (for a third time) to study whether the state should issue its own currency in the form of silver and gold coins. (Source: Dunne, J. and Lietaer, B., “Rethinking Money: How Different Types of Money Will Stabilize the Economy,” The Huffington Post, February 6, 2013.)

First introduced—and rejected—three years ago, the idea seems to be catching on. Georgia, Montana, Missouri, Colorado, Idaho, Indiana, New Hampshire, North Carolina, South Carolina, Tennessee, Utah, Vermont, Virginia, and Washington are all considering the possibility of issuing their own gold- and silver-backed currency.

But why now and not three years ago? The world is a much different place now.

In November 2008, Federal Reserve Chairman Ben Bernanke initiated the first round of quantitative easing (QE1), snapping up $2.1 trillion worth of mortgage-backed securities and Treasury bills.

Between November 2010 and June 2011, Ben Bernanke enacted a second round (QE2), printing an additional $600 billion. For most policymakers, a closed number like $2.7 trillion probably seemed like a manageable amount.

Not for long, though. In September 2012, a third round (QE3) was announced. And this time, it’s open-ended—you could even call it “QE Eternity.” The idea that the Federal Reserve could continue to print money indefinitely isn’t as easy to swallow as a manageable $2.7 trillion.

Currently, one-third of the American states are looking at fortifying their state economies with currencies backed by precious metals, a tangible asset that retains its face value—as opposed to the U.S. dollar, a fiat currency that is backed by the good will of the Federal Reserve, an institution that may, or may not, be fallible.

If you can’t wait for the development of a state-run currency but are still nervous about the U.S. debt crisis and want to protect and even build your wealth, you might want to consider a currency exchange-traded fund (ETF).

That said, not all currency ETFs are created equal.

Currency ETFs can be used to diversify a portfolio into different currencies. Because the U.S. dollar is weakening against many foreign currencies, other stronger nations will see their currencies increase in value. Instead of stuffing your account with U.S. dollars and/or jumping into the foreign exchange market, you may want to consider currency ETF PowerShares DB US Dollar Index Bearish (NYSEArca/UDN).

This ETF tracks the performance of the Deutsche Bank Short US Dollar Index (USDX). The fund is designed to provide investors with a cost-effective way to capitalize on the fall of the U.S. dollar.

The index that this ETF follows is based on six currencies: the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc. (Source: “PowerShares DB US Dollar Index Bearish,” Deutsche Bank web site, December 31, 2012, last accessed February 11, 2013.)

Currently, the PowerShares DB US Dollar Index Bearish trades near $27.50, with an average three-month volume of over 61,000 units. The fund’s net asset value is approximately $92.5 million, and the management expense ratio is 0.8%. (Source: Yahoo! Finance, last accessed February 11, 2013.)

As the U.S. dollar drops in value, it will take other currencies with it. But some currencies will become stronger, and a few will contend to replace the U.S. dollar as the world’s next reserve currency.

The post Portfolio Protection Against the Collapse of the U.S. Dollar appeared first on Investment Contrarians.

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