How Should We Secure Our Investments?

Over the last few years, the question about which currency we should invest in has been raised regularly. There are plenty of currencies circulating in the world but as a point of reference let's take Indian rupee. As you probably know, metals and commodities are denominated in USD, as are ETFs on shares from many countries. Companies like Gazprom can be bought in ruble, euro or dollar. In what currency, then, we should make transactions? Does the currency in which the asset is denominated have any meaning for us?

Well, in the vast majority of cases no. When buying gold, we are interested in the price in INR. When buying Russian shares, we have actual exposure to shares and to rubble to rupee relation. It doesn't matter if we buy shares denominated in EUR, USD or RUB. In some cases, the currency has some meaning, so I have divided transactions into several types that will help you understand when the currency in which an asset is denominated matters and when not.

It is important because in the coming months I expect sharp turmoil and further strengthening of safe-haven currencies like USD or CHF. Over time, however, when central banks will sharply lower interest rates and launch unlimited printing, the time will come for purchases. Over 85% of assets are denominated in USD and I make almost all investments in this currency. However, if central banks after a few months of turmoil buy peace again, another bull market will be very similar to that of 2003-2008.

Considering the 16-year cycles on the dollar, the migration of capital to emerging markets and to commodities, it is very likely that after reaching the peak U.S. dollar will gradually get weaker, as it happened in 2002 - 2008. That time, the dollar fell from 49 rupees to less than 40 rupees (18% drop). Is it possible to lower the exchange rate to around INR 59 (18% drop from the current 72) in the long run?

In my opinion, such a strong sell-off of the dollar against the rupee is very unlikely, but not impossible. On the other hand, I think that the fall of dollar value is almost certain over the next few years. Therefore, in some cases, we should protect ourselves against such a scenario. In this case, the most useful is forex on which we bet on an increase or decrease of a given currency. For example, buying a contract for the INRUSD currency pair we gain when the rupee appreciates against the dollar. Thus, if we have investments only in dollar assets, what we lose on the dollar weakening against the rupee, we gain on the INRUSD futures contract. Here, let us understand each other clearly: by forex, I understand some hedging of our investment against exchange rate fluctuations. No leverage, no speculation. Pure protection and this is only in some particular cases.

Now I have to go into some details because very often there are misunderstandings as to when we actually have exposure to the dollar and when we don't.

a) Precious metals

Let's assume for the sake of discussion that we are buying ETF for gold. We have a choice of three funds denominated in USD, EUR or CHF. From the investor's point of view, does the choice of currency matter? Absolutely not. Many people intuitively choose CHF, considering the franc the safest currency. Meanwhile, it does not matter, because we buy gold and we have exposure to gold.

To allow you to understand easier, I will go back to January 15, 2015, when the Swiss Central Bank stopped defending peg on the franc. In one day, franc went up by 15%. Have we earned this 15% with ETF for gold denominated in CHF? No, because the strengthening of the Swiss currency meant that the price of gold expressed in CHF fell exactly as much as the franc strengthened. The price of funds denominated in USD or EUR practically has not changed. When buying ETF for gold, silver or commodities, we ensure exposure to the asset, not the currency in which the contract or ETF is denominated. Therefore, when investing in commodities or precious metals, we do not need a hedge on currencies.

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