Profit from the falling dollar with mutual funds
The dollar hit a new low for 2009 on Tuesday, and it looks feeble on a technical basis (see breakdown in chart to left, from FinancialSense). With Helicopter Ben reappointed and no policy changes in site, the dollar-pummeling should continue unabated.
How to Play It?
Foreign currency and precious metals can offer protection from a depreciating dollar. International stocks can also offer upside, but this article will focus on how retail investors can get exposure to currency and metal.
Merk Hard Currency Fund (MERKX)
Alex Merk’s flagship fund has a single purpose: to benefit from a falling dollar. It invests in countries with sound monetary policies, through currency and government bonds. Their record so far is solid, outperforming the short-dollar trade by 3-1 since 2005:
Overview of MERKX holdings:
From Merk’s official site:
This strategy seeks to take advantage of the dollar’s decline relative to these currencies, may help to diversify your portfolio, and potentially decreases downside risk against a decline in the dollar. The Merk Hard Currency Fund indirectly provides access to these currencies, while seeking to mitigate stock market, credit and interest risks incurred by alternative means of access, such as the typical international equity or bond fund.
Most of us will never have the skill required to play Forex and foreign-debt markets. Paying a pro like Alex Merk 1.3%/year to mange this part of your portfolio is a steal. Note: 13% of the fund is currently invested in gold. There’s a PDF with more details on MERKX here. Merk also offers an Asian currency fund. They apparently offer exposure to the Chinese Yuan, which is quite difficult because of international restrictions. Haven’t looked into this one much though.
Evergreen Precious Metal Fund (EKWAX)
This gold fund is up a whopping 531% over the last 10 years. Compare that to the S&P 500′s dismal -24% performance. It’s up 46% since January ’09 when I wrote this piece. EKWAX primarily invests in gold miners, but has exposure to silver, copper, platinum, and other metals. From the January article:
Chasing past performance is usually a bad idea, especially with mutual funds. But this is a unique period in America’s history. We have unique risks like hyperinflation, and the only-whispered possibility of dollar collapse. Plus, gold stocks have taken a beating over the last year. EKWAX is down from a high of $81 to $46 today. So at least you’re not buying in at the very top.
Every investor should have some exposure to precious metals. There are a few ways to achieve that: physical ownership of bullion (coins/bars/grams), stocks, or mutual funds like EKWAX. Picking individual gold stocks is hard, it requires a lot of industry-specific knowledge.
Gold and silver have been on a tear lately, so waiting for a pullback might be prudent. But timing these neurotic markets is near-impossible. Dollar-cost-averaging into positions works well (spread your buys out over time). If we get another big pullback, I’d look to add to metal positions, as I did in Jan/Feb. If you’re interested in riskier metal plays, see Investing in Palladium.
Dollar Demise
The Chinese are not fans of Ben “Saved-The-World” Bernanke and Geithner. They see unsustainable deficits and QE resulting in dollar devaluation, and aren’t happy about it. This NYT piece makes the case. It describes China’s effort to establish Yuan-denominated bonds interationally.
A historical shift is clearly underway. The move has been gradual, so far. Hopefully it will stay that way. But a growing minority think a dollar-collapse is inevitable, with countries panicking in a rush to dump dollar assets. It’s impossible to say if/when such a move will happen. But so far America has dismissed calls for fiscal discipline, insisting that lenders not worry (and keep that cash coming).
Long-term, it seems wise to position for a declining dollar. We’re up to our eyeballs in debt. Does anyone really think America is going to cut spending or raise taxes enough to make up the shortfall? Seems fanciful. Dollar devaluation is the easy way out.
Disclosure: Long EKWAX, GG, gold, silver, palladium. No position in other stocks/companies mentioned.
Disclaimer: Nothing posted here is investment advice. It is for educational purposes only. Always consult a financial professional when making investment decisions.
Labor Day Edutainment
Must-Read: China Alarmed by US Money Printing – (Telegraph) “Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets,” he added. “The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.”
Us Govt Pays for GSE Legal Bills – (NYT) Taxpayers are footing the bill for former Fannie and Freddie execs, yay! Makes me feel like my tax dollars are being well spent.
A Black Hole Called the Federal Reserve – Extreme and hyperbolic, yeah. But maybe that’s what we need to change this corrupt hellhole of a financial system:
Karl Denninger on Banks and our “Recovery” – (Market-Ticker.org) “No fractional reserve system can survive with charge-off rates much beyond 1% over any material amount of time. Rates beyond 2% threaten near-imminent collapse. This is inherent in how fractional reserves work – with a 6% Tier Capital ratio 2% charge-off rates eat dramatically into your Tier Capital – and this assumes that your “assets” are marked accurately. You can try to make this up with “earnings” (and the banks are) by charging outrageous interest rates, but as you can see from the above chart all this has done is feed back into higher delinquency and loss rates, becoming self-defeating.”
Even if you disagree with Mr. Denninger, you gotta admit the guy knows his sh*t. He prefaces the above statement with this, “What’s worse, however, is the news contained in this chart:”
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