For investors saying that 2015 started off with a bang would be a massive understatement. While it was fairly easy to see that volatility was coming, the size of the shocks caught even seasoned analysts off guard. What was even more of a surprise is where the shocks came from.
The Swiss Miss
The biggest jolt came when the Swiss Central Bank (SNB) unexpectedly threw in the towel trying to keep its currency pegged to the euro. For currency traders it was like being dumped out of bed in the middle of the night by a fire alarm. Global currency markets reeled from the shock for days and the aftershocks are still being felt. It pointed out just how much currency manipulation is going on in the world and how easily those markets can be upset. Perhaps even more ominous is the awakening knowledge that such instability can be introduced into markets with policy changes dictated by bureaucrats in a country roughly the size of Maryland.
The Swiss shock is only the beginning of what will almost certainly be an escalating frequency and severity of currency skirmishes. For decades the world has been engaged in a global race to the bottom in currency valuations. The Chinese are the grand masters at currency manipulation, keeping the yuan artificially depressed so Chinese imports are always attractive in overseas markets. It also keeps a steady supply of manufacturing jobs flowing to China from overseas.
As the rest of the world gets tired of losing jobs to China central banks around the world have become emboldened to take a more aggressive stance protecting their own exports and manufacturing jobs. To do that central banks have to manipulate the value of their own currencies, like the Swiss were trying to do, to keep manufacturing jobs at home. As more countries become willing to make bold moves to protect jobs imagine what that’s going to do to global currency markets. Look at the turmoil one country could generate and imagine the chaos that could ensue as dozens of countries all start fighting for the same scraps.
If you’re not worried about the potential for global currency warfare and the effect it could have on the broader economy, you should be. Markets can’t be free if they’re not fair and the rest of the world is no longer willing to tolerate letting one big country get away with cheating. What we’ll end up with is, instead of one big cheater, we’ll have everyone trying to game the system and chaos will result.
Hard assets are how you hedge your personal wealth against currency wars. By keeping hard assets, like gold and silver, you’re fixing that portion of your wealth to an asset that will maintain relative value to whatever is passing for currency at the time you need to redeem it. Whether the value of a dollar goes up or down, the price of gold will adjust to that new reality.
That doesn’t mean you should go overboard, either. Gold and silver do not pay dividends or grow revenues. Precious metals have carrying costs that can include storage and shipping. In a balanced portfolio hard assets have a place, but so do stocks and bonds. In times of turmoil it’s more important than ever to stick to a diversified portfolio and a disciplined investment strategy. Part of that disciplined strategy is rebalancing at least twice a year based on prevailing market conditions and your investment plan.
To protect your wealth going forward, convert a fixed percentage of your wealth into high quality gold and silver bullion products that are easily recognizable and redeemable. The U.S. Mint makes both Gold and Silver Eagles that provide excellent value for the new precious metals investor. U.S. Mint products are widely recognized in the precious metals industry and can be traded and sold in a wide variety of markets.
By having part of your wealth insulated from the coming currency wars, you can rest easier knowing that part of your portfolio is safe from the vagaries of petty bureaucrats and heavy-handed central banks.