The threat of economic instability is now common in the worldwide financial scene. Amid economic uncertainties, the world is once again pondering what assets to possess in case of a decline in the dollar. Although forecasting the future of a currency is difficult, it is wise to think about ways to protect your finances.
This list explores potential resources and investment opportunities that can protect against economic instability and guide management in unpredictable financial circumstances.
Real Estate
The recent performance of the S&P CoreLogic Case-Shiller Home Price Index—the U.S. National Home Price Index—is a complex measure of single-family home price changes across nine US regions, and this helps us understand the resilience of the real estate market. With a 5.5% annual gain in December 2023 and with cities like San Diego and Los Angeles reporting even higher increases, it’s evident that the housing market has maintained its upward trajectory.
While market conditions fluctuate, the long-term trend of increasing home values positions real estate as a recommended option for those who intend to protect their wealth and generate long-term returns. Moreover, rental income provides a steady cash flow, further enhancing real estate’s appeal.
Foreign Bonds
Investors holding bonds denominated in that currency can benefit from the bond’s yield and gains when a foreign currency appreciates relative to the US dollar. In the scenario of a collapsing dollar, foreign bonds become even more attractive. A depreciating dollar leads to an appreciation of other currencies. Consequently, investors holding foreign bonds would receive the bond’s interest payments and profit from the increased value of their foreign currency holdings when converted back to dollars.
Suppose a US investor buys a 10,000 Euro bond yielding 3% when the Euro is worth $1.20. A year later, if the Euro strengthens to $1.30, the investor receives the 3% interest and gains from the increased value of their Euros when converted back to dollars. This dual benefit can significantly boost returns, especially if the dollar weakens.
Precious Metals
Precious metals, particularly gold, are a reliable hedge against dollar depreciation. Central banks worldwide hold substantial US dollar reserves, underpinning its strength. However, a weaker dollar can inflate the cost of dollar-denominated commodities, including gold, for foreign buyers. This increased demand often drives up gold prices.
Historically, gold has had an inverse trend when compared with the dollar. The 2022 surge in inflation initially coincided with a weaker dollar, causing gold prices to decline to below $1,630 per ounce in September and October of that year. However, as inflationary pressures persisted and recession concerns grew, gold prices rebounded strongly through the end of 2022 and into 2023.
Cryptocurrencies
Cryptocurrencies like Bitcoin have emerged as potential alternatives to traditional fiat currencies, particularly amidst concerns over economic instability and the collapse of the US dollar. Their decentralized nature and independence from government control influence investors who wish to diversify their portfolios and hedge against inflation. While some experts believe cryptocurrencies could appreciate significantly in such a scenario, others caution that their volatility and market immaturity could lead to unpredictable results.
Foreign Currencies
Foreign exchange (forex) trading involves speculating on the value of one currency against another. Taking the MSCI European Union (EU) Index as an example, the impact of currency fluctuations on investment performance is substantial. While the index generated a respectable 4.84% return in local currency terms year-to-date through August 7, 2024, the net return for US investors was dampened to 3.54% due to the strengthening dollar. Similarly, when the dollar weakens, the opposite effect occurs.
This disparity shows the importance of considering currency movements when investing overseas. Returns on foreign investments are magnified as the converted amount into US dollars increases. This phenomenon can substantially boost overall portfolio performance.
Commodities
Commodities offer a unique investment avenue during periods of economic distress, mainly when the dollar’s value is under pressure. As tangible assets, they can hedge against inflation and currency devaluation. For instance, precious metals like gold and silver have historically been considered safe-haven assets, as their value often rises during economic uncertainty. Agricultural commodities like wheat and corn can benefit from supply chain disruptions or extreme weather events that impact production. However, investing in commodities involves inherent risks, including price unpredictability and the risk of significant losses.
Collectibles
The collectibles market, poised for substantial growth with an expected surge from $458.2 billion in 2022 to over $1 trillion by 2033, offers a compelling investment case for when the US dollar weakens. The value of collectibles is often driven by scarcity and uniqueness. As the dollar’s purchasing power erodes, the relative value of rare collectibles tends to increase. A weaker dollar can also stimulate demand for collectibles from international buyers, further driving up prices. Besides, it is an alternative to traditional assets like stocks and bonds, offering portfolio diversification.
Individual Retirement Accounts (IRAs)
Due to their growing significance in US retirement savings, IRAs offer potential protection against a collapsing dollar. With $11.7 trillion in assets, comprising 34% of total US retirement market assets in mid-2022, IRAs have become a cornerstone of financial planning. Their diversification benefits, including investments in domestic and international assets, can help mitigate risks associated with a weakening dollar. Additionally, tax advantages like tax deferral offered by traditional IRAs can be beneficial in inflationary environments, often accompanying currency devaluation.
Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities (TIPS) are government-backed bonds designed to protect investors from inflation. When inflation rises, the principal amount of TIPS increases, ensuring that the interest payments (based on this adjusted principal) also grow. This makes TIPS a particularly appealing option in scenarios where the dollar is expected to weaken due to rising inflation. Since the U.S. government backs TIPS, they are considered a very low-risk investment, providing both security and a hedge against inflation.
Foreign Stocks and Mutual Funds
Investing in foreign stocks and mutual funds can help protect your portfolio if the U.S. dollar weakens. When the dollar drops, foreign investments can increase in value when converted back to dollars. For example, owning shares in a European company like Nestle could give you gains both from the stock’s growth and the stronger Euro. Mutual funds that invest in different countries also benefit from currency strength, providing added security against a declining dollar. By including foreign stocks and mutual funds in your investment strategy, you can hedge against domestic market volatility, potentially enhancing your overall portfolio performance.
Emergency Supplies
Stockpiling essential supplies, such as non-perishable food, water, and medical supplies, forms the bedrock of physical preparedness. Simultaneously, cultivating skills like gardening, first aid, and basic survival techniques enhances self-sufficiency. A diversified approach incorporating financial assets and tangible resources is crucial for weathering economic downturns like the dollar collapse.
