My dear impertinent, dear impertinent,
More and more of you ask me what currency to buy to hedge against inflation.
If you were to make fun of me, I would tell you to subscribe to the STRATEGIES letter and, in particular, to read the file whose image you have at the end of this article and all the others that I publish regularly to allow you to build the best wealth strategies. protection!! But before going any further by subscribing to the STRATEGIES letter by clicking herehere are some things to think about to answer this question that will also allow you to understand for non-subscribers how a Strategies letter works.
What currency should I buy to protect myself from inflation?
If you ask me which currency to buy to protect yourself from inflation, I will tell you that this question is only valid if you believe that certain currencies are less affected by inflation than others.
So we have to start by looking at inflation country by country.
What do you find-where?
That all the countries that have large so-called “safe” economies, such as neither Zimbabwe nor Venezuela, nor Argentina, continue to be affected by inflation, starting with… the United States, the largest economy in the world that has just exceeded 8.5 %. annual inflation, which is the highest in 41 years!
If all economies are affected relatively equally by inflation, then there is no better currency than ours…
So don’t buy US dollars!
However, this observation must be qualified.
Because there are also changes in the relative parities.
Yes, we are in a floating exchange rate system, which means that the value of the currencies evolves with each other and fluctuates according to a certain number of parameters that I will not list all of them here, but let’s say that to simplify without being totally simplistic, the dollar is the currency of the 1st world power, so when there are risks of war, the reflex is to buy the dollar, which becomes a refuge currency that appreciates in relation to all the others, and that is how it is today. The euro falls against the dollar.
If the dollar appreciates 10% against the euro and you only have 8% inflation in euros, then the 10% profit on your forex transaction will even leave you with a 2% profit!
So, you have to buy US dollars!
As you can see in this graph, the euro dollar falls sharply as it goes from 1.16 euros per 1 dollar to 1.08 between November 2021 and today. above all we see that it goes from 1.14 to 1.08 between the outbreak of the war in Ukraine and today.
To think that the dollar will go to parity 1 for 1 is quite logical. This leaves a potential appreciation of 8% on a forex trade of this type, which with 7.5% inflation in Europe on average allows you to offset losses.
However, is the dollar a good currency?
The answer is no when we know the abysmal level of indebtedness of the United States and its chronic annual deficits.
This means two things.
In the short term, the dollar is a currency that will appreciate against the euro because the war makes it serve as a safe haven and if the situation worsens, all Europeans will try to save the money from the United States, and that the FED, the American central bank , will raise its rates before the ECB does so for its part. Christine Lagarde pompously calls this the “desynchronization of monetary policies”. Etant un modeste économiste de grenier normand, on peut dire plus simply choses in explaining simply that les taux ne vont pas monter en même temps, ce que implying that placements in «dollars» were later plus rémunérateurs than placements in «euros», So… You have to buy dollars.
In the longer term, the dollar is a moldy and rotten currency like any other, which will not protect you from inflation any more than the euro or the pound sterling.
We have two problems.
The first is an excessively expansive policy of monetary creation. Too much money is created, so each amount of money is worth less in purchasing power. The second is that we have a problem of resources and raw materials. There aren’t enough left for everyone to keep them cheap! So we have structural inflation linked to the scarcity of natural resources. And here central bank policies can do no more than create recessions to reduce demand and make resources last a little longer. Hence the high volatility of energy prices in the last 10 years.
So, you should not buy dollars but gold..
Yes, but with rate hikes, gold will go down. So shouldn’t you buy gold short-term, except gold could go up even if rates go up?
Has it good?
But in what case?
Well, if, for example, inflation continues to be higher than interest rates and that is exactly what is happening. Basically, your booklet A earns 1% and inflation is 5%, so the real interest rate is -4%.
What makes the value of gold is not the nominal rates (the announced nominal rate) but the real rate, the one from which inflation is discounted. As long as real rates are negative, gold goes up. It is as old as the world.
So we can buy gold.
But then, should you buy dollars?
Yes in the short term and to desensitize yourself to the risk of the “euro” and the risk of the “war in Europe”, but in the long term you have to buy gold.
What a last thought for the road.
The euro is falling against the dollar, but gold is rising in dollars, so which is better to buy? Gold or dollars?
I’m kidding, but if you’ve followed the reasoning so far, you’ve found the answer for yourself, and that’s the work I do for my STRATEGIES newsletter subscribers. My ambition is to allow you to understand what is happening so that you can understand things for yourselves and make decisions in a free and informed way, because it is your money, your life, your families, and that you will always be in the best. position to know what is best for you and those you love and want to protect.
Those who want to know more about Subscription to STRATEGIES, all the information is here.
The answer is that you can buy dollars in the short term and gold in the long term, and if you want to take a shortcut and not manage any exchange risk, you buy gold directly, gold that allows you to buy… in the present and in the future all the currencies of the planet !
It is already too late, but all is not lost.
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