Diversifying your portfolio with the world’s major currencies
By Rodney Johnson, President HS Dent

Recently the US Dollar has been oversold, losing value at a rapid pace relative to other currencies. Over the last three months, the US Dollar has declined by 25% against the Australian Dollar, 8% against the Swiss Franc, and 31% against the South African Rand. As the level of fear surrounding the global financial crisis has abated, investors have been more comfortable divesting of the US Dollar. This current round of devaluation seems like it is peaking, but this is may only be an intermediate situation. The next banking crisis could first hit in Europe because there are major loans to the declining Eastern European economies priced in Euros and as the Euro rises these loans are becoming more difficult to repay. But the problems for the US Dollar are much bigger than the current financial crisis and may resurge when our economy is dragged down by the potential European crisis later this year, which could be the event that triggers our broader “prime” crisis in residential and commercial real estate. Some of the long-term hurdles our currency faces are:

• With the US slowing down as boomers age, it is likely that we will not be the growth engine of the next 5-10 years. If other areas of the world are growing faster, then their currency base should be stronger than the US Dollar. Europe and the Euro will face even stronger slowing pressures from baby boom aging, likely making the Asian currencies the biggest winner down the road.
• Unlike the late 1920s and early 1930s, the US is entering this difficult economic season as a net debtor. US consumers, businesses, and the US government itself have binged on credit, putting us in a poor position internationally during this crisis where we have relied on other nations to lend to us to support spending. It is highly questionable that such lending will continue.
• The US government has exploded the money supply faster than Europe and most emerging nations, which in theory will cause the debasement of our currency, whether it happens slowly or quickly. At this point, our currency is likely to fall later – more like late 2009 to mid-2010 and beyond when our “prime” real estate crisis hits and we have a real depression emerge between mid 2010 and early to mid 2011. As the debasement occurs we lose purchasing power compared to other currencies.

As the current crisis has unfolded, we have had many readers asking us how to diversify away from the US Dollar. While the dollar is too low and oversold to bet on this protection policy near term, such a diversification strategy could be more appropriate later this year and into 2010. So, we set out months ago to find a way for individual investors to easily denominate some of their holdings in currencies other than the US Dollar. Our search led us to EverBank, which is a US, internet-based bank. This bank allows you as an investor to put monies on deposit and then purchase either a foreign currency denominated money market account (World Currency Access Deposit) or a foreign currency denominated CD (World Currency CD or World Currency Index CD). The benefits to these programs are the ease of transaction and the ability to remain with a US based bank.

Putting Everbank to the Test

In order to test the system, we opened an account with EverBank months ago, just as the US Dollar was peaking. There is a fair amount of documentation that has to be completed, and then of course you are required to choose what it is you wanted to do. Being a regular internet bank, EverBank has a myriad of choices for its clients. The ones we were interested in (I’ll get to another shortly) were the World Currency Access money market and the World Currency CD/World Currency Index CD. We weren’t interested in trying to choose one “winner” currency versus the US Dollar. Our goal was to pick a basket of currencies that we believed from our research would hold up well as we go through this economic turmoil.

We ended up choosing a World Currency Index CD. The index we chose was the Commodity Index CD which is an equal weighting of South Africa, Australia, New Zealand, and Canada. There are many choices of individual currencies as well as many different baskets. There are great reasons for choosing currencies that have conservative banking (like Canada, Australia and New Zealand), or perhaps strong fiscal management (like Norway, Sweden, Switzerland or Singapore). The key is that as an investor, based on your view of how things will unfold and your individual risk tolerance (to sit through the volatility of exchange rate fluctuation), you can pick one currency, create your own basket of currencies, pick a preset basket, or mix and match.

The key in this volatile time of markets and currencies is to consistently hedge and bet against the major trends up and down in the US dollar and most counter currencies – and in stock, bond and commodity markets. Hence, using investor sentiment models and momentum models are key for prospering in this long and volatile downturn ahead!

Because denominating deposits in foreign currency takes a few steps, if this is a diversification move you are interested in then you should get set up now so that when the timing is correct you already have the pieces in place. Currently the move would be to invest more in the US Dollar, and perhaps the Japanese Yen which tends to correlate more with the US dollar. Then if the Dollar bounces as we would expect later this year or into 2010, then you can switch to the safer counter currencies like Canada, Australia, Norway and Singapore, and etc.

Accounts at EverBank are FDIC insured against the failure of the bank, just like a normal US savings account – but NOT against fluctuation of account value if your deposit, CD, money market, etc. is denominated in a foreign currency. This is the risk/reward of having a deposit in a foreign currency – it might go up as the dollar loses value, but it also might go down if the dollar strengthens.

We liked EverBank so much that we invited them to our HS Dent Financial Advisor’s Conference in Phoenix last May, and created an affiliate program with them. To find out more about what they do, visit http://www.EverBank.com

If you find yourself calling them to learn more or open an account, tell them that you heard about them through HS Dent. While Everbank does not actively pursue clients outside of the US, they will review applications on a case by case basis. So if you are in another country it is still possible to use Everbank to affect these transactions.

Buying Precious Metals

In addition to currencies, EverBank also deals with precious metals. Since this is also something we have discussed in our newsletter, we reviewed this process as well. While anyone with a brokerage account can purchase GLD (the ETF that hold gold and fluctuates in tandem with the spot price of gold), it is a little bit harder to purchase physical gold.

EverBank allows to you buy physical gold and hold it in one of three ways – 1) unallocated, meaning that you own a portion of a large holding of gold, 2) allocated, meaning that the gold you purchased is physically identified and held in your name (and there is a charge for this), or 3) in physical form shipped to you, meaning that you specify what it is you want to buy (maple leaf coins, buffalo coins, ingots, etc.) and EverBank will have it delivered to you.

Just as with currencies, we are not recommending that individuals purchase and store large quantities of gold. It is better to simply have smaller quantities of gold coins and silver coins as smaller denominations should have purchasing power in case of short periods of civil unrest, etc. What we are suggesting is that for those who are interested in hedging themselves against what would be a worst case scenario, EverBank has made the process of purchasing the physical metal fairly painless.

We expect that gold will continue to move more sideways to down as stocks edge up into July or so of 2009, and then possibly see a final bull market rally into 2010 or so when the next banking and worldwide crisis sets in. After that, gold is likely to deflate for many years to come and is not as likely to be attractive outside of hedging against potential civil unrest. We are likely to recommend buying gold again when we think the US stock market is peaking in its bear market rally around late July or so.

We recognize that there are two reasons for diversifying outside of person’s home currency as well as purchasing precious metals – 1) investment reasons, when investors believe that there will be changes in relative values (your home currency weakens against other currencies or inflation causes the price of gold to rise, etc.), and 2) as a long-term safety net to protect against the decline of an investor’s home economy. Almost all of our discussions concern reason 1, where there is an investment objective, however many comments and questions that we receive regard reason 2. A company like EverBank, or whatever relationship you use to affect the same transactions, can help you satisfy both types of goals. Visit www.Everbank.com