Uncle Sam responded to a ‘once-in-a-generation’ type of global economic crisis in 2008 with near-zero interest rates, rapid money supply expansion, and gargantuan fiscal stimulus.
Now comes the harder part of timing the orderly removal of these measures.
If the measures are withdrawn too soon, the recovery could be derailed and the economy can recede. If the measures are kept too long, the risks of inflation and asset bubbles increase.
Investors are increasingly betting that the Federal Reserve is likely to flounder. Even though current inflation data are not a cause for concern, gold has been on a tear rising nearly 38% since the start of 2009. Washington’s measures have taken a toll on the U. S. dollar. The U. S. dollar index is down nearly 9% since the turn of the year.
Buy Gold: GLD and IAU
One obvious way is to invest in gold by buying shares of SPDR Gold (GLD) or iShares COMEX Gold Trust (IAU). Despite being right with my call for gold breaking through the $1,000 an ounce mark in ‘Commodity Trading Strategies: Profiting from Gold and Natural Gas‘, I believe there are better ways to hedge against potential Federal Reserve follies.
Gold has risen strongly in recent trading sessions and the entry point is far from ideal. Furthermore, gold’s upside potential can be limited if the U. S. economy cooperates and makes the Fed’s job easier.
Better ways to hedge include investing in foreign bonds and selected foreign stocks. Unlike gold, these investments offer the possibility of paying off well even if the Fed gets its timing right in withdrawing measures used to fight the deep recession.
Buy Foreign Bond Funds and ETFs: LSGLX and BEGBX
Foreign bonds offer the benefits of providing foreign currency exposure, geographic diversification, current income, and potential for capital gains. Most individual investors are however not equipped to analyze individual foreign bonds. Foreign bond funds like Loomis Sayles Global Bond (LSGLX) and American Century International Bond (BEGBX) and ETFs like SPDR Barclays International Treasury Bond (BWX) and SPDR DB International Government Inflation-Protected Bond (WIP) are a good way to go here.
Foreign bond funds and ETFs are typically less volatile than gold and the current income they generate can come in handy in limiting damage if the Fed gets the timing right and the U. S. dollar rallies against foreign currencies.
Buy Selected Foreign Stocks Funds and ETFs: FICDX and EWA
You can profit from a decline in the U. S. dollar by investing a portion of your portfolio in well-managed, natural resource economies like Australia and Canada. Natural resources like oil and base metals are priced in U. S. dollars and often rise in price when the dollar declines. Natural resource producers can also benefit from the demand for raw materials needed to support growth in China and India.
iShares Australia ETF (EWA), iShares Canada ETF (EWC) and Fidelity Canada Fund (FICDX) are ETFs and mutual funds that focus on Australia and Canada. Such investments provide foreign country exposure and geographic diversification. They also offer the possibility of substantial capital gains from their indirect emerging market exposure.
So, think beyond gold as you seek ways to protect yourself from the Fed’s policies. Foreign bonds and stocks in selected natural resource economies certainly merit consideration.