Following the Bretton Woods agreement post World War II, and the agreement between the United States and Saudi Arabia in the 1970s to trade oil in US dollars, the US dollar stood alone as the preeminent global currency for almost 80 years. While the United States continues to enjoy this status, concerns are increasing around the dollar’s near-term status due to the recent acceleration in US sovereign debt and the recent weaponization of the dollar to achieve geopolitical goals. While the demise of the US dollar in the short term is premature, minimizing the risk of a declining dollar in one’s portfolio is prudent asset management. See below for options:
Precious Metals/Commodities/Rare Art
When considering historical safe havens from dollar weakness, assets such as precious metals (gold, silver, industrial metals, etc.), commodities (oil, natural gas, agricultural products, etc.), and even rare art come to mind. While these assets can prove helpful in the fight against a weakening dollar, there are important things to consider. First, these assets can be highly volatile and dramatically underperform other asset classes, such as stocks, for long periods. In fact, a quick look at gold’s performance over the past 11 years, for example, shows little price appreciation while the broader stock market, including dividends, is up approximately 275%. Second, these assets can prove illiquid and impractical for people relying on quick and easy cash flow for ongoing bills. Finally, if you want to own assets physically, it will come with additional costs and expenses. For example, if purchasing physical gold and silver, you will pay a premium over the spot price to cover commissions to the seller and incur an expense to store the assets safely.
US Companies with International Exposure
Investing in high-quality US-based companies with significant overseas sales revenue can be a more practical way to defend against a weakening dollar. These companies provide goods and services consumers consistently need over time and can pass many of their underlying cost increases, due to a weak dollar, on to domestic US consumers. Additionally, any overseas sales revenue in a currency strengthening against the US dollar must be translated back into US dollars for reporting purposes.
This improves sales numbers in US dollar terms, potentially leading to higher stock prices.
Direct International Exposure
Another practical way to guard against a weakening US dollar is to gain direct exposure to overseas assets. This can be accomplished through direct investments in specific foreign companies or through a basket of companies via exchange-traded funds (ETFs) or mutual funds. While these assets are often more volatile and involve more risks than the high-quality US companies mentioned above, they are often the only option for investors within 401(k) plans.
**IMPORTANT NOTE: The appropriateness of the options above is case-by-case specific. If the prospect of a weakening dollar has you concerned, seek the advice of a Certified Financial Planner™ to determine the right course of action for you.**
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