Using Currencies to Diversify Your Portfolio
by Axel Merk
Axel Merk is the president and chief investment officer of Merk Investments. I spoke with him in recently about investing in currencies.
Charles Rotblut (CR): When someone talks about investing in currencies, what does that actually involve?
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Axel Merk (AM): Obviously, everybody has heard of the U.S. dollar, but other countries and regions have their own currencies—say, the euro or the Swiss franc or the Australian dollar or even the Chinese renminbi [yuan]. And if you want to conduct business in that currency, you have to exchange your money; currencies always trade in pairs, and it’s always one currency versus another one.
There are two main ways that we think about currency investing. One is called directional currency investing, and that would be the U.S. dollar versus a currency, a basket of currencies or a managed basket of currencies—say, the U.S. dollar versus the dollar index, which is a basket of currencies, or versus one of our currency funds, two of which are managed baskets of currencies.
The other way to think about currency investing is in a non-directional sense. Non-directional currency investing might take offsetting positions in currencies outside of the U.S. dollar. As an example, rather than taking a position in the U.S. dollar versus the euro, you might think about the Australian dollar versus the New Zealand dollar. What this entails is taking long or short positions in any one currency.
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Discussion
Investing in currencies is a zero sum game. There is no internal rate of return here. I would have asked Mr. Merk how he can acheive positive long-term returns in this environment. It seems to me that his long-term stategy is to bet against the US dollar (which may be a good bet) against foreign currencies with stronger fundmentals. Is there more to it than this?
posted 11 months ago by Steve from Pennsylvania
I've been investing in Australia government bonds for the past 6-7 years. They are rated triple A and pay (based on my current holdings) about a 5% yield. This is on a 5 year maturity. I believe they are safer than US Treasuries and the yield is a bonus. The downside is the interest payments are in Aussie dollars with zero yield until you rollover the bond when it matures. The upside is the Aussie dollar may just appreciate while you are waiting. The cost is 1.5% to convert your US dollars when you buy the bonds and another 1.5% when (if ever) you convert the Aussie dollars back to US dollars. When i first started doing this the Aussie dollar was worth 70 cents US. Now the Aussie is worth $1.04 US.
posted 11 months ago by Clyde from Wisconsin
It sounds like this guy being interviewed is trying to plug his fund. I think the best idea if you want exposure to foreign currencies is to buy international stock and/or bond index funds, which should already be part of your portfolio, anyway. Most of those are unhedged (you can check if they are) so they give you all the exposure you need to foreign currencies.
He says that most foreign companies are selling their goods to the US, so you don't get the foreign currency exposure, but I don't think that's true (Europe is a bigger economy than the US overall; the Asian economies do a lot of trade with each other and with Europe), and, even if it were true, foreign countries still are mostly exposed to their home currencies (their costs are local, after all; German workers get paid in Euros).
At some points in the interview, he says the foreign currency markets aren't that hard to understand. I admit I don't know that much about it, but my impression is they're very difficult to understand. If you're looking at past history, you can say, well, this currency dropped because of this reason, but my impression is currencies are very difficult to predict going forward, and there are a lot of big hedge funds and banks trying to predict them every day who have a lot more information and expertise than the average investor.
In sum, my inexpert opinion is to ignore the currency funds. Just invest in international index funds that don't hedge their currency exposures.
posted 11 months ago by Marshall from Massachusetts
The only mutual funds I've found for hard currencies are MERKX and ICPHX, and ICPHX has a front-end load. Is anyone aware of another no-load fund for this besides MERKX?
posted 11 months ago by Mike from Pennsylvania
It is too easy to simplify currency trades as simply driven by supply and demand. Macro economic factors play a huge role in the direction of movement. To bet $ against Yen, I will need to understand the short term and long term macro factors for Yen.
The same is true for every other currency pair. You need to know a lot about the macro environment as well as government policies to bet against/in-favor of any currency.
And it is a zero sum game (just like options).
Good luck gambling on currency.
posted about 1 month ago by Samir Desai from Texas
Back in the mid 90's I made some nice money trading futures with the Euro which was gaining on the US $. However in today's frantic trading and constant changing financial environment in the world and US, I think it would be a brave soul who would enter the currency arena now.
posted about 1 month ago by Richard English from Virginia
