December 9, 2011
BY: Robert Hallberg, Topics: Currencies
We are living in a world of currency depreciation and the purchasing power of the money in your bank account is slowly dwindling away. And even though I am a huge advocate of gold, it is still necessary to keep some dry powder on hand. Having cash and being liquid gives you courage and it opens up opportunities to take advantage of bargains that may present themselves in a liquidity crunch.
However, some currencies are better than others and its important to diversify your holdings. Since the fiat currencies today are not backed by gold or any other commodities, the strength of a currency depends of the strength of that countrys economy. Favorable characteristics for a strong currency include, a positive balance of trade with other nations, positive real interest rates, and a stable monetary base, to name a few. Running a budget surplus and keeping a reasonable debt load also contributes to a sound economy.
The chart below compares a collection of fiat currencies against gold. They are all significantly down against gold over the last 10 years. The U.S. dollar and the British pound are among the worst performers.
The Swiss franc and the Australian dollar have been among the best performers, while the Canadian dollar and Norwegian Krona has not been too far behind. However, Switzerland has recently announced that they will peg their currency to the Euro, which will limit its future viability.
The table shows different currencies and important characteristics contributing to a sound currency.
Chart Currency table
To limit your liabilities I suggest diversifying your currency holdings into the Australian dollar and the Norwegian Krona. Norway for example, is a major oil exporter and has a very strong trade surplus and a manageable debt load. Australia is also major commodity exporter and has a low debt-to-GDP ratio.
Although these currencies are far from perfect, they have stronger fundamentals than many other countries currencies and should depreciate less. Furthermore, if you live in the US, it may be practical to keep some money in the US dollar despite its poor performance. The US dollar is still the worlds reserve currency and will likely have a rally in the event of a liquidity crisis or panic.
To learn about trends and spot the next investment opportunity read the Casey Report from Casey Research. It's a monthly investment news letter that breakdown economic trends in a way that is easy to understand. They make recommendations based on economic reality and their track record is several times better than the market or any mutual fund for that matter.blog comments powered by Disqus