Personally I really hope that never happens, some years ago I would have laughed at anyone who suggested the dollar was on the brink of collapse, plus I openly confess to being a fan of the Euro, it really did seem like a good idea at the time.
I was wrong, but what now?
Starting any article with a confession about how wrong my previous judgements were about the dollar and euro blows apart any pretence to market clairvoyance skills.
The fact is I don’t know if the euro and dollar are about to collapse, I really hope not, but there are some massive alarm bells ringing that tell me to at least take cover until the storm’s over.
I think the worst thing any investor can do is nothing, and just hope for the best when things start to smell bad.
It’s like hanging on to the same shares year after year just waiting for that good year to come. Don’t marry your investments, use them when they’re being good and dump them quickly when they start to present any uncomfortable signs of risk that you don’t want to be part of.
But how do you dump dollar and euro and what do you buy instead?
Watching any form of financial news and you’ll hear the same old: ‘safe havens like gold and the Swiss franc are in strong demand.’ Sure but are they such a safe haven? I personally don’t completely go for that, I don’t think it’s just that simple. I’m not saying don’t buy into gold or Swiss francs, I’m just saying don’t go in ‘okay, me too’ style.
Lets just take a quick look at those safe havens.
Today the Swiss National Bank made it very clear that they don’t want the world and its dog buying Swiss francs, they’ve intervened heavily and up to the point of writing, USD has gained 2% against the franc.
If the Swiss franc carried on rising it would have a seriously detrimental effect on the Swiss economy and threaten their own price stability. They said that, not me!
You can’t guarantee a safe haven currency in a country that would suffer enormously economically if the franc gained too much strength against either the Euro or the US dollar, any more than you can have a safe global reserve currency in a nation so up to its eyeballs in debt the lights would have gone out long ago if it hadn’t been for foreign loans.
Gold keeps rising – OK maybe it will, maybe it will go on to $2,000 an ounce, but where’s the top, does anyone really know? Does that make it an absolute safe haven? NO!
The current speculative rise in gold makes it less safe not more safe. It doesn’t matter what the investment instrument is, if you’re aware of significant speculative behavior around it you should always tread more cautiously and not assume it’s a ‘cannot lose’ safe way out of this crisis.
Is gold in a bubble then? I doubt anyone really knows the truth of that any more than they did with any other speculative bubbles, but there are signs, so caution should be applied.
My take on gold and its current hype is that there seems to be a lot of the same personality types now buying gold heavily who would have also jumped into .com or real estate without a thought previously. Getting in is easy, getting out is the tricky bit.
At this point, before I start to sound like I’m anti-gold, I’m not, I own gold, I invest in gold and I believe it’s a wise choice to make, but I don’t believe it’s a magic bullet.
Why gold could lose it’s lustre very quickly.
I’m stepping into my positive persona now. Let’s say that the US and European economies do start to pull themselves back into shape, that will make the equities market much more interesting. If things do start to turn there really are some very attractively priced equities out there at the moment and a rash of equally exciting IPOs could see a lot of people selling their gold to get in on the next big thing.
If you can’t do positive any more and you’ve really given up hope of Europe and the US getting back on track any time soon, that doesn’t mean there are no other nations that couldn’t create such great interest that gold gets put back in the vault for another day.
It may well be time to start to look East. The BRIC (Brazil, Russia, India and China) don’t have the same problems as the West. Sure, if Europe and the US go into a massive recession or even depression the BRIC would catch a very nasty economic cold, but their internal markets are growing far faster than western markets and they could well make a much faster recovery than the grey old western markets.
It just isn’t that simple to come up with a can’t fail plan that would enable you to avoid suffering heavily in the event that either the Euro or the US Dollar melted down completely. The simple solutions like exchanging everything for gold or some other precious metal may inadvertently leave you locked into a bubble that will make any previous bubbles look like non events.
So what can you do?
First don’t panic, there’s an incredible amount of doom and gloom about at the moment, adopting headless chicken mode won’t help one bit. My guess (remember I was wrong before) is that both the USD and the Euro will survive.
I’m not so confident in the Euro but I do like to think than the Eurozone would at least be able to organise an orderly collapse… with massive damage limitation strategies in place. The US dollar is just going to slide to more realistic values.
When I say more realistic I mean that dollar’s future value will be much more related to the perception of the value of the US’s financial credibility rather than its value as a reserve currency.
The US dollar is different to all other world currencies in that it has effectively been artificially boosted for many years because of its vital role as the world’s reserve currency rather than the pure financial confidence in the US.
What we’re seeing now is most nations making a steady move to a more balanced wealth reserve. The techniques that nations are applying to protect their wealth can, to a certain degree, be copied by us. I’m only talking about the economic techniques here, no need to plan any neighbourhood invasions.
Instead of trying to figure out which horse to back, make a far greater effort to build a balanced portfolio.
One thing though, I think sometimes having a balanced portfolio gets mixed up with having a diverse range of equities, that’s not the same thing.
When stock markets plunge the good tend to get pulled down with the bad.
How balanced you can really be does depend on your current level of wealth and how often and soon you need access to it. Your ultimate goal should be to say well if gold dumps 50% of its value or the stock market does the same then you’ll only lose 10-15%. Not nice but you will survive. Don’t be sold any magic bullets, use your judgement, if you start to feel that you’re way too over invested in one arena then balance things out.
Greed more than any other single factor leads us to making our biggest losses, closely followed by our ego not wanting to admit it was wrong!
Deciding that gold is the only way to go or that equities now represent the best value that they have in over a quarter of a century will eventually lead to being too heavily invested when the correction comes, it will come, it always does!
Factor in the ‘what if’ scenarios but don’t run scared. Don’t fall in love with any single form of investment, use them all and never let them use you.