Question: There’s a lot of chatter about paper currencies of the world losing their value. And of course, the U.S. dollar is usually mentioned as vulnerable due to our excessive national debt. Is there any way to protect against this possibility other than by buying gold or silver or other precious metals? I don’t have any overseas business transactions, and I’m not planning to travel abroad anytime soon, but still I wonder whether I should be concerned. Also, do you think that some large countries, such as China — which has been buying a lot of gold lately — will tie their currencies to gold?
Ric: First of all, buying gold and silver and other precious metals is not regarded as a valid way to protect yourself against a decline in the value of U.S. currency. You’re assuming that gold prices will rise if the value of the dollar declines, but if you look back over long periods, you will discover no correlation between the two. It’s a myth, nothing more than marketing propaganda by the promoters of gold, silver and other precious metals to get you to buy what they’re trying to sell.
If you’re seriously trying to protect against fluctuations in currency, the only place you can purchase an investment with a direct correlation to currency fluctuations is in the options and futures markets. There you can trade contracts that are bets about the future value of the dollar.
But this approach is problematic for three reasons.
The first is that the commissions for trading these contracts are so high that, in many cases, you have to earn a 20 to 40 percent profit to break even.
Second, all the contracts are short term, which means that profitable trades are subject to top marginal tax brackets, not the lower long-term capital gains rates — thus reducing your net profits.
Third, because the contracts are short term (under one year, with many lasting only days), not only do you have to be right about which way the currency will fluctuate, you also have to predict when the fluctuation will occur — because if the move occurs later than you thought, you lose. In other words, it’s not enough to be right; you have to be right at the right time.
That is extraordinarily difficult to do, which is why the people who tend to make the most profit from playing the currency game are the brokers selling options and futures contracts, not the investors trading them.
Because you don’t have business interests overseas and aren’t planning to travel there, it’s really not an issue for you. If you were going to plan a vacation to Europe, I would tell you to buy euros now, to lock in today’s price and protect yourself from future fluctuations in value. That way you’d know what you’re going to spend on your trip, but since you’re not going, it doesn’t matter.
My point is, for an American consumer living in America and buying American products, currency fluctuation is not a concern. Currency fluctuation applies only to people dealing with foreign currencies in business or travel. Since that’s not you, you can ignore all those sales pitches.