How to Protect Your Wealth as U.S. Dollar Heads for Major Downturn

The U.S. dollar has been a false safety blanket for investors fleeing market carnage… Take gains while you can, because soon, the bubble bursts. We can already see signs of weakening…

But beware the news – the monstrous spin machines that overlook some of the fundamental characteristics of the greenback. Let’s go back in time a little for an explanation.

For the two and a half months ending Oct. 28, the U.S. Dollar Index climbed 21%. There was no question why this rise happened… Investors swarmed to cash, dumping all their stock and getting out of the markets altogether.

No surprise, really, when the Dow dropped more than 15% in the same time frame, with an ultimate low-loss of 31% back in mid-October. The Nasdaq has fared even worse: Down 23% with its greatest loss at 35%.

So cash became king…

The Greenback’s False Sense of Security

But it’s a false sense of safety. Every fundamental aspect of the dollar’s strength – outside this overwhelming demand – is a bright red flashing warning sign, and no one’s paying attention.

In fact, our government racked up a $452 billion gap in the U.S. budget deficit in the first three months of the current fiscal year of 2009 (commencing in October ’08). That’s on top of the $455 billion in FY 2008, and a drop in the bucket compared to the $7.2 trillion the Treasury, the Federal Reserve and the FDIC have committed to spending.

To those of you who think that the dollar will remain king in 2009, you may want to consider this: The Financial Times notes that the big developed economies are slated to issue $3 trillion worth of new debt in 2009. Two-thirds of that, or a whopping $2 trillion, will come from the United States alone.

Nobody can print like the U.S. of A., and at the end of the day, a currency’s strength is all about supply and demand. None of this bodes well for the U.S. economy.

The only reason the bottom of this charade has not fallen out is because investors still continue to see cash as safer than equities.

Safer Than Equities?

Let me say unequivocally: It’s not.

Investors can still “lose money” by holding cash. If you jumped into the dollar rally back on Oct. 31, 2008, after that little pop, you saw a gain of 2.9%. A gain’s a gain in these times, eh?

Not if you consider what happened next. The U.S. Dollar Index fell 6.4% by mid-January, with an ultimate low-loss of 12.2% back in mid-December.

That means that if you had $1,000 stashed away back in October, that grand would have been worth only $936 in mid-January.

So you can lose money by doing nothing…

FOREX.com notes, “[October] USD-buying demand was most likely behind the late week rebound in the USD and we will be watching closely to see how the USD fares once such buying is no longer present.”

And in fact, volume on the U.S. Dollar Index futures has dropped off significantly.

Scotiabank Group’s Foreign Exchange Outlook says, “We maintain our view that the structural systemic deficiencies inherent in the United States credit and equity securities markets, together with a worsening fiscal outlook on the back of massive debt issuance activity, will translate into a weaker USD through the end of 2009.”

Stop Wasting Your Money…

So there’s risk is doing nothing… There’s risk staying in cash. Should you have some socked away for a rainy day? Absolutely. The recommended strategy is to have eight months’ worth of living expenses saved. And if you absolutely need cash right now… if you can’t afford to let it sit for more than five or 10 years or more… take it.

But if you’re running for cover simply out of fear, you’re literally wasting your money.

So what’s an investor to do?

The good news is there are plenty of ways to diversify and hedge against the dollar. You could, of course, use the tried and true method of buying precious metals, like gold and silver. There are even ETFs that make investing in these metals as simple as buying a stock.

Talk to your broker about the SPDR Gold Shares ETF (GLD:NYSE), or the iShares Silver Trust (SLV:NYSE).

But before you do… take a look at the PowerShares DB US Dollar Index Bearish (UDN:NYSE). It’s a mouthful to say, but it’s a simple concept.

This ETF gains in value when the U.S. Dollar Index loses value.

Here’s a two-year chart:

Now, let’s compare it to the dollar’s performance against the euro:

A near-perfect inverse relationship.

What does this mean for an investor? By investing in the PowerShares DB US Dollar Index Bearish (UDN:NYSE), you’re hedging against any dollar depreciation.

That means if you had invested $1,000 in UDN at the same time as “saving” $1,000, starting back on Oct. 31, you would have preserved $24 of your money, or 38% of your losses.

And, savvy investors can even turn this hedge into a moneymaking opportunity. The UDN offers options, which can leverage your gains quite nicely.

It doesn’t sound like much, but over long periods of depreciation, which the U.S. dollar should see in 2009 thanks to our print-happy government, the preservation of wealth becomes even more important to investors.

One way to preserve - and grow - your wealth is to profit from today’s ultra-hot currency markets. And Taipan Publishing Group can help you do that. In fact, on February 9th, Taipan Daily’s Justice Litle and I will be leading a Free Web Summit to show you how you could see potential double- and even triple-digit gains from global currencies. This is the perfect time to profit from currency markets. Learn how in our Free Web Summit, The Safe Way to Cash In on the Global Currency Market: A Look Ahead at 2009. Sign up now… It’s FREE.

Originally published January 26, 2009.

Other Related Topics: Exchange-Traded Fund , Investment Opportunity , Sara Nunnally , U.S. Dollar

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