“Buy This Commodity Currency Before the Dollar Drops Any Further”

By Travis Johnson, Stock Gumshoe, October 27, 2009

That’s the pitch made by Stephen Leeb (sorry, Dr. Stephen Leeb) for his ETF World Alert newsletter. We have all seen the dollar give up it’s panic-led gains in recent months, as the fear of future inflation and the unsustainable nature of the federal budget make investors wary that the only way to handle America’s massive debt is with devaluation — probably a stealth devaluation over a long time period, but devaluation nonetheless.

I don’t know if that’s true or not, but it is certainly logical on its face — I can’t imagine the US repaying our outstanding federal debt in my children’s lifetime, unless we repay it with dollars that are worth less than they are today.

So what does Leeb think we should do? Buy a commodity currency, apparently — with the theory that although virtually all currencies on the planet are “fiat” currencies (meaning they’re not explicitly backed by hard assets, just by the promise of the government), the currencies of countries that have vast natural resources should hold up better because those commodities will support their economy and their foreign exchange balance.

On the flip side, the US, of course, also has dramatically vast natural resources, too … we are, for example, the third largest oil producer in the world … it’s just that we use all that oil and import even more than we produce. And we all probably know that resource wealth can be a curse to good governance and sound business practices, and a boon for authoritarian regimes who’d prefer to pad their own pockets. So owning natural resources wealth by itself is not enough, otherwise we’d be falling over ourselves trying to buy the Zimbabwean Dollar because of their vast diamond resources, or the Naira to profit from Nigeria’s vast oil reserves under the Niger Delta.

But still, we all can probably pick some of the most prominent major commodity currencies in the world that have also been relatively stable over the years — the Australian, Canadian and New Zealand Dollars, the Norwegian Krone, the South African Rand and, if you can handle a little more historical volatility, the Brazilian Real are the ones that come to mind for me. Pretty much any country whose economy relies significantly on commodity exports and isn’t otherwise a total disaster (which tends to exclude Russia and the Ruble, though that can definitely be debated).

So which one does Leeb think we should buy, and how? Here’s his pitch:

“Buy this commodity currency before the dollar drops any further…

“Here’s an easy way to profit from the continued decline in the U.S. Dollar and the rise in commodity prices: invest in resource-rich currencies.

“Just last week, participants in Leeb’s ETF World Alert made a 10% return in just 10 days from buying and selling an exchange-traded fund that invests in one of the most promising non-Asian resource-rich nations.

“This was not an options game. Just a simple “buy low, sell high” trade that produced a sizable gain in a very short time frame.

“But that’s just the start. We expect further gains from this nation, so we’re buying shares in another ETF that invests directly in its currency. That way, we can make money from both resource prices and dollar weakness. Plus, the ETF pays a dividend of 2.2%. It’s a conservative play that could pay off handsomely.”

OK, most of the commodity currencies are non-Asian, so that’s not much of a clue — I guess we could consider Russia to be an Asian country if you like, but otherwise the larger economies like Japan, China and India are mostly importers, not exporters of natural resources. And with the dollar’s fall several commodity currency ETFs could have risen about 10% in ten days recently, and they do tend to move in sync against the dollar, so that’s also a clue of limited utility.

But we do get the 2.2% dividend, so that helps to narrow it down — Canada’s money market yield, which basically drives income for these ETFs, is far lower than that so we can scratch them off the list, and South Africa’s is far higher (and the currency hasn’t done well in the last month and doesn’t necessarily track with other “commodity” currencies), so we can scratch them, too.

And thankfully, there are a fairly limited number of easy-to-trade currency ETFs out there, even if you include the slightly different ETNs, and most of them are for the more popular currency pairs that include the Japanese Yen, Euro, British Pound or Swiss Franc against each other or the dollar (or Rupee or Renminbi). Of the commodity currency ETFs avaialble, the one available for the New Zealand dollar, from WisdomTree, does not yield anywhere near 2%, so scratch that one. There is not yet a currency ETF for Norway that I’m aware of.

So we’re left with what were probably the favorites to begin with: Australia and Brazil.

The ETFs associated with these currencies are the WisdomTree Dreyfus Brazilian Real Fund (BZF), one of what they call their Currency Income ETFs, and the CurrencyShares Australian Dollar Trust (FXA).

BZF paid an annual distribution of about 70 cents last December, so that gives them a yield of about 2.6%. They only pay once a year and I don’t know what the distribution is likely to be this year, so the income should probably be considered to be a little bonus on top of any currency appreciation. FXA pays a monthly dividend that currently gives them a trailing yield of about 2.5%, so they both match up just about right on that clue — though FXA has dipped a bit more than BZF in the last few days, so it’s more likely that we can match them up with a recent 2.2% yield.

And I’m going to guesstimate that FXA is indeed the ETF that Leeb is teasing, in part because they get a little closer to the teased 2.2% yield, and in part because the Australian currency had more short term upside over the past month, so you can get closer to a 10% gain over a recent ten day period. The reason it’s still a guesstimate is that BZF and FXA very closely track each other over the past year, so it’s really splitting hairs to pick one as “more promising” over the other, but here’s my rationale:

They had a more abrupt positive move in October, thanks to the Australian government’s somewhat unexpected interest rate hike (when interest rates climb the value of the currency tends to climb, since you get paid more for holding that currency); they are arguably more promising as an exporter because they’re closer to China, the fastest growing consumer of iron ore and many of their other commodity products (Brazil and China are tightening their ties too, however); they’ve historically been much more “reliable” politically than Brazil, so they don’t tend to make foreign investors as nervous (not sure if that’s reasonable or not, but that’s how I read the tea leaves); and long-term bond rates, which are one way to measure expectations of inflation and currency fears, are signifiicantly higher for Brazil than for Australia (Australia’s 5-year bond currently yields a bit over 5.5%, for example, Brazil’s equivalent bond is nearer 13%).

As US investors (most of us, anyway — I don’t mean to discount my delightful readers in Australia, Canada or anywhere else), this is clearly a way to explicitly bet that those “commodity currencies” will outperform the US dollar, or to hedge against the rest of your life that’s dollar-dependent, or against an investment portfolio that might be too focused on the United States. Buying companies that are based in or do most of their business in these countries can also be a way to get exposure to these countries, but some companies hedge their currency risk and most large companies are global enough that it’s hard to be sure you’re really getting the currency exposure you might want. Both of these funds have relatively low expense ratios, though they could arguably be lowered significantly given what must be extremely simple portfolio management (FXA is .4% annually, BZF is .45%).

So this is a relatively inexpensive and certainly easy way to make a currency bet — or even a leveraged currency bet, since both do have options available for trading (the options are pretty low volume, generally speaking, so not great for traders who want liquidity). They’re not the only way to get exposure to these or other commodity currencies, though — you could also trade on the foreign exchange markets or futures markets for currencies, which can be very low cost and offer dramatic leverage (I don’t ever do this, but if you’ve experience as a forex or futures trader feel free to share your thoughts); or you could buy one of the mutual funds that aims to get you into non-dollar currencies and gold (the Merk Hard Currency Fund, MERKX, comes to mind — high expense ratio, but they allocate among gold and a changing basket of non-dollar currencies. It has underperformed both FXA and BZF over the past year or so, but is less volatile); or you could invest in a deposit instrument that focuses on one or several of these currencies, like the deposit accounts or CDs from Everbank, most of them give you FDIC insurance for your principal but don’t prevent you from losing money if the currencies you invest in fall (ie, you’re insured for the number of Norwegian Krone you buy, not for what those will be worth versus the dollar based on whatever calculations they use for that valuation at maturity).

I don’t have anything invested in any of those, just to be clear, and I don’t have any relationship with them or recommendation to give you, those are just some options I’m aware of. For my own portfolio I do generally want to be overexposed to foreign currencies and economies relative to what many advisers suggest (I usually hear 20-30% or so recommended, I’d prefer to be around 50% non-US), but I don’t have any particular ability to successfully guess whether the short term will bring another dollar rebound or another commodity spike, or something inbetween.

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So what do you think? Doom ahead for the dollar, or are the naysayers wrong? If you don’t like the dollar, how would you prefer to profit from that predilection? Look for other fiat currencies that should outperform the dollar, or go straight to the commodities themselves? Something else? Let us know with a comment below.

We do not currently have any reviews on file for Leeb’s ETF World Alert, but we have many reviews of his multitudinous other services if you’d like to see what Gumshoe readers think — and if you’ve got your two cents to share on Dr. Stephen Leeb, please submit your own review and share the wisdom you’ve gained from experience. Thanks!

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