Updated: May 3, 2013 12:14PM
Originally published: December 7, 2004
If you want to speculate on the future value of the dollar or hedge your own dollar investments, here are some easy ways to do it.
Foreign currency CDs. You don’t have to go to a foreign bank to convert your dollar savings into a foreign currency. At www.Everbank.com, you can buy an FDIC-insured certificate of deposit, denominated in any of 20 major foreign currencies. The CDs range in maturity from 3 months to 12 months and pay the current rate of interest in that currency. For example, the rate on a 12-month eurodollar CD is about 0.85 percent.
When the CD matures, you can convert back to dollars. If the dollar has declined in value, then your euro CD will be worth more dollars. But if the dollar rises, you may get less than $10,000 back at the end of the year. Minimum investment is $10,000 for CDs, but there is also a non-interest paying “Access Deposit” that lets you put $2,500 into a foreign currency account, and convert back to dollars at any time.
Financial futures. You can easily speculate on the future value of the dollar using the futures markets. The Chicago Mercantile Exchange offers futures on 36 currencies. For example, you can buy an e-Mini EuroFX contract that is worth 62,500 euros, or -- at today’s prices -- about $475. Futures brokers require about $5,000 margin on one contract. If the euro moves from 1.33 to 1.34, you’d have a profit of $625. A one cent decline results in a loss of the same amount. That’s called leverage, and it requires some knowledge and discipline to trade these markets.
Gold. This has been a traditional hedge against a decline in value of the dollar. In just the past two years, gold has risen from $230 an ounce to $450 an ounce without attracting much attention. Buying the metal itself in the form of bars and ingots involves storage costs, and should be done only through a reputable dealer. Or you can buy non-collectible, gold bullion coins such as the Canadian Maple Leaf, valued for their gold content.
But there’s a brand new way for individuals to invest in the precious metal. In the last month, the World Gold Council has offered “streetTRACKS Gold Trust” shares listed on the New York Stock Exchange under the symbol GLD. It’s an open-end fund, with each unit worth one-10th of an ounce of gold. As the price of gold rises, so does the value of your shares, which you can buy through your broker. One caution: because these shares represent a “collectible,” even if you hold them for longer than one year, the gains are treated as ordinary income.
Gold-mining shares and funds. Gold-mining companies are big winners when the price of gold rises. Their product becomes more valuable at no extra cost of production. Most of these companies pay dividends. Instead of selecting individual mining companies, the novice investor is better off in a mutual fund that specializes in picking the best stocks, and passes along the dividends. According to Morningstar, some of the top performing no-load funds are: US Gold Shares Fund (800-US-FUNDS); American Century Global Gold (800-826-8323), and Toqueville Gold (800-697-3863).
Foreign stock, bond funds. If a foreign currency becomes more valuable, then owning a stock denominated in that currency increases in value, unless the price of the stock declines for whatever reasons. Similarly, owning a foreign bond gives you the potential for currency gain, as well as earning interest on the bond itself.
Most U.S. mutual funds use futures markets to hedge their exposure to foreign currency fluctuations, preferring to stake their profits and their reputations on the choice of bonds and timing the interest rate markets.
But the T. Rowe Price International Bond Fund (800-638-5660) makes a point of being un-hedged, and thus has profited from the dollar decline. And many mutual funds that buy foreign stocks are unhedged, such as the Vanguard Total International Stock Index fund.
As you consider these investments, remember that the dollar has already had a huge decline in value, and big profits have already been made by those who predicted the dollar’s decline.
If the dollar turns around and starts rising in value, there’s always a risk of loss. That’s the price of being a currency speculator. And that’s The Savage Truth.
Terry Savage is a registered investment adviser, and appears weekly on WMAQ-Channel 5’s newscasts. Distributed by Creators Syndicate.