How to Hedge Against a Collapse in the U.S. Dollar?
Inflation has seemingly returned to the United States. Oil prices have resumed their upward march, and gasoline prices are following close behind. The prices of commodities and food are also increasing at an alarming rate. The price of meat, corn, wheat and other foodstuffs has gone up, decreasing the purchasing power of consumers. Inflation represents a real threat to the financial stability of the U.S.
Inflation decreases the relative value of a currency, in this case, the U.S. dollar. A falling dollar results in rising prices. It must be made very clear that this is not a sustainable situation. A currency cannot constantly fall. Eventually, it will either collapse entirely or stabilize and stop falling. When a currency collapses, the result is usually hyperinflation. In hyperinflation, prices increase so rapidly that the currency quickly becomes worthless. It is impossible to buy or sell using the hyperinflated currency, so the economy suffering from hyperinflation quickly devolves into a barter economy.
Hyperinflation may be coming to the United States. Presently, the U.S. dollar continues to fall in value relative to other currencies. Investors and consumers concerned about inflation naturally seek out the best hedges. During the high inflation of the 1970s, the best assets to hold were real estate, commodities, stocks with small market capitalizations and debt. Mortgage borrowers experienced tremendous benefits in the 1970s. Every year, the value of the debt they owed decreased significantly.
In today's environment, there is considerable debate whether or not commodities like gold and silver are in a bubble. Gold climbs ever higher, recently closing at a record $1,476 per ounce on Friday, April 8, 2011. Silver closed at a record $40.93 per ounce.
Looking forward to the future, investors and current or future retirees would do well to consider diversifying away from the dollar. If commodities seem too risky, and short-term price volatility would bear this out, consider investing in stable foreign currencies. Foreign currencies offer immediate protection against a collapsing U.S. dollar. If the unthinkable happens and the dollar completely collapses into a hyperinflationary frenzy, investors who have their wealth in foreign currencies will be protected. Importantly, they will be in a position to move their assets back into whatever currency replaces the dollar after it collapses.
The most stable foreign currencies thus far are the Norwegian kroner, the Swiss franc, and the New Zealand dollar. All three currencies are from politically and economically stable countries. Switzerland, in particular, has a reputation for financial stability that is centuries old. There are several ways to invest in foreign currencies. Several exchange-traded funds or ETFs exist that deal exclusively in assets denominated in foreign currencies. The simplest way is to open a bank account denominated in a foreign currency, but this is often impractical for the average investor.
The biggest risk in owning foreign currencies is that the exchange rate between the dollar and the currency will change. This could result in losses to the investor. Since the currency is a hedge against the dollar, this is an acceptable risk.
