How to Hedge Against a Falling Dollar
With the federal government faced with economic stagnation and mounting deficits, the temptation is strong for policymakers to pursue inflationary measures, which have the short-term effect of boosting exports and employment and making existing debts easier to repay. To that end, the Federal Reserve announced a 600 billion dollar "quantitative easing," or expansion of the money supply, in late 2010. The risks of such a policy, however, include a declining dollar and the rapid increase in the costs of commodities and anything exported from abroad.
Instructions
1 Buy foreign securities. These securities can be bonds, stocks or sovereign debt--as long as the original security is not denominated in dollars. If the dollar falls in value relative to the other currency, the price of the security in dollars will go up. You can easily purchase foreign securities by contacting a broker and purchasing ADRs, or American Depositary Receipts, which represent shares of ownership in foreign corporations, or you can purchase shares of mutual funds that invest some or all of their assets abroad. Some funds will hedge their currency exposures to eliminate currency risk. However, if your objective is to hedge against the declining dollar, you may wish to consider a fund that does little or no currency hedging. Read the fund's prospectus to learn the fund manager's strategy or policy regarding currency hedging.
2 Purchase real estate. Because the real estate is a finite resource (there is only so much of it) it tends to hold its value even as the dollar declines or inflation increases. If the purchasing power of the dollar declines, the crop yield of a piece of land does not, nor does the potential rental revenue from a developed piece of real estate. Land tends to hold its value in inflationary environments better than cash.
3 Buy gold. Gold has historically served as the standard store of value and a refuge even when currencies and entire governments collapse. In fact the value of many currencies, including the dollar, have been historically defined by their convertibility to a given quantity of gold. However, the Nixon Administration removed the dollar from the gold standard in the early 1970s, an event followed by nearly a decade of severe inflation.
4 Diversify into commodities. Other commodities, including everything from precious metals to oil to wheat to pork bellies, have historically helped investors hedge against declining currencies. You can gain exposure to these assets by contacting a Series 7 qualified broker or financial advisor, by directly purchasing items such as jewelry or silverware or by owning stock in businesses that stand to gain by the increase in commodity prices, when priced in dollars, such as farms, ranches, oil companies and mines.
5 Purchase other currencies directly. You can purchase hard currency through a bank or currency exchange outlet, though you will generally pay a fee or commission. You can also purchase CDs denominated in other currencies via a broker or gain direct exposure to currencies via FOREX trading.
Instructions
1 Buy foreign securities. These securities can be bonds, stocks or sovereign debt--as long as the original security is not denominated in dollars. If the dollar falls in value relative to the other currency, the price of the security in dollars will go up. You can easily purchase foreign securities by contacting a broker and purchasing ADRs, or American Depositary Receipts, which represent shares of ownership in foreign corporations, or you can purchase shares of mutual funds that invest some or all of their assets abroad. Some funds will hedge their currency exposures to eliminate currency risk. However, if your objective is to hedge against the declining dollar, you may wish to consider a fund that does little or no currency hedging. Read the fund's prospectus to learn the fund manager's strategy or policy regarding currency hedging.
2 Purchase real estate. Because the real estate is a finite resource (there is only so much of it) it tends to hold its value even as the dollar declines or inflation increases. If the purchasing power of the dollar declines, the crop yield of a piece of land does not, nor does the potential rental revenue from a developed piece of real estate. Land tends to hold its value in inflationary environments better than cash.
3 Buy gold. Gold has historically served as the standard store of value and a refuge even when currencies and entire governments collapse. In fact the value of many currencies, including the dollar, have been historically defined by their convertibility to a given quantity of gold. However, the Nixon Administration removed the dollar from the gold standard in the early 1970s, an event followed by nearly a decade of severe inflation.
4 Diversify into commodities. Other commodities, including everything from precious metals to oil to wheat to pork bellies, have historically helped investors hedge against declining currencies. You can gain exposure to these assets by contacting a Series 7 qualified broker or financial advisor, by directly purchasing items such as jewelry or silverware or by owning stock in businesses that stand to gain by the increase in commodity prices, when priced in dollars, such as farms, ranches, oil companies and mines.
5 Purchase other currencies directly. You can purchase hard currency through a bank or currency exchange outlet, though you will generally pay a fee or commission. You can also purchase CDs denominated in other currencies via a broker or gain direct exposure to currencies via FOREX trading.
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