We’ve all seen the headline about the US dollar: inflation and overprinting by the Federal Reserve is crushing its value. But is this actually the case? During the COVID-19 pandemic, the Federal Reserve certainly had its printers going. Between January of 2020 and October of 2021, 80% of the total US dollars that ever existed were printed to sustain the economy. So basic economics right? Oversupply leads to lower demand for the greenback, thus devaluing it when compared to other currencies and assets. So what are the best hedges for a devaluing dollar?
Is the US Dollar Devaluing?
It became a popular notion that the US dollar would eventually be worthless.
While that seems like a rational train of thought, a lot would have to go wrong for this to happen. First, the US dollar is highly sought after by international trade partners.
The US dollar is still the preferred currency of the world, no matter what you have read.
But being worthless and devaluing are two different things altogether.
Has the oversupply of US dollars devalued the currency? Absolutely. Sky-high inflation rates are a direct effect of overprinting, and the US economy is getting hit by the highest inflation in years.
This is one reason why the Federal Reserve is set to hike interest rates in 2022. Rising interest rates will rein in inflation, and help stabilize the economy.
This also means that currently, leaving your cash in a next to zero interest rate savings account means you’re losing value. It’s why it is important to look at assets that act as the best hedges for a devaluing dollar.
What Makes a Good Hedge?
What are the best hedges for a devaluing dollar? There are certain characteristics to look for that make an investment a great hedge against a devaluing dollar.
First, price stability is a major key here. You don’t want a hedge to be volatile because that defeats the purpose of hedging in the first place. Assets that do not move much in either direction make for perfect hedges.
Diversification is also a great way to hedge against things like inflation or a devaluing dollar. Have you ever heard of the 60/40 rule for hedging?
Traditionally this has been 60% of your portfolio in stocks and 40% in bonds. While bonds aren’t a terribly popular way of investing these days they are a safe financial instrument that can bring stability to your portfolio during volatile times.
Historically there are a number of assets that perform well even during times of high inflation. Knowing which assets continue to perform well in this environment can go a long way in maintaining strength in your portfolio.
Assets that can appreciate on their own in addition to providing income are another excellent hedge. Let’s take a look at some of the best hedges for a devaluing US dollar.
Best Hedges for Devaluing Dollar: Gold
Is Gold one of the best hedges for a devaluing dollar? Gold is likely the first hedge most investors will think of.
Other precious metals like silver are also on this list.
But gold stands out because it is used as the reserve for many of the Central Banks around the world.
Gold also holds its purchasing power over long periods of time, something the dollar does not do.
Gold isn’t without its flaws though. Warren Buffett is famously against investing in gold as it pays no dividends, and refers to it as an asset with no utility. Buffett himself is a value investor who would much rather invest in a gold mining stock, than gold itself.
What’s the logic behind gold? The dollar is devaluing but the value of gold is measured in fiat currency. Can you spend gold if the currency is worthless? Not exactly. If you want to physically hold gold it’s heavy and cumbersome to store.
But the fact is, in times of inflation and volatility, gold is a safe haven that much of the world continues to trust. Whether you agree with Buffett or not, hedging against the dollar with gold is a proven way to preserve your wealth.
Buying gold mining stocks is a fine substitute if you prefer. When the price of gold is rising, mining companies do well due to the fixed-cost nature of the business. Most mining companies also pay out dividends and will generally rise alongside the price of gold.
Best Hedges for Devaluing Dollar: Stocks and ETFs
Are stocks and ETFs the best hedges for a devaluing dollar? Yes, you can just continue to purchase stocks to counteract the devaluing dollar. Oftentimes, we will see a rotation from growth to value stocks in times of volatility.
This can be true for your portfolio as well. If you can’t decide on which stocks to buy you can even try buying them all! An S&P 500 index fund like SPY is one of the best ways to ensure steady annualized gains.
Even in times of inflation, US companies tend to perform the best out of all global markets. Monetary policies like quantitative easing can also add extra liquidity to local stock markets as well.
Like Buffett, a large number of us might just find this more appealing than investing in gold. With steady dividends and broad sector diversification, index funds might just be the best hedge to a devaluing dollar.
Real Estate and REITs
Did you know the real estate market is a part of the best hedges for a devaluing dollar?
The real estate market is a largely underappreciated sector for stock investors.
Buying actual real estate is a great way to hedge your portfolio, but this also requires a lot of upfront capital.
Real estate has a finite supply and an ever-present demand in most markets around the world.
Houses or apartments can bring in real cash flow via rental income, and provide investors with added asset leverage as the price of the property appreciates.
So why haven’t more investors bought shares of REITs or Real Estate Investment Trusts? REITs are underutilized by most investors even though they can provide such a stabilizing presence to your portfolio.
These assets pay regular dividends at a high dividend yield, often on a monthly basis. Not only do REITs rarely fall much during volatile times, but they bring in exceptional cash flow to your brokerage account.
A controversial hedge, no doubt. As much as Bitcoin has risen in price over the year, it hasn’t exactly performed as a great hedge. The crypto markets have become sympathetic to the stock markets, so there isn’t much difference in performance right now.
Bitcoin itself has been exceptionally volatile over the past couple of years. I can see why investors who are not as bullish on crypto would want to stay away.
Bitcoin isn’t deflationary in the way other crypto tokens are. While other protocols burn tokens to reduce the supply, Bitcoin battles inflation by raising its purchasing power.
The finite number of Bitcoins creates a supply and demand tug of war that leads to a rising price. Bitcoin hasn’t quite been adopted as a global currency yet, but it’s definitely improving its adoption.
A lot of people refer to Bitcoin as digital gold. While it certainly shares characteristics, recent performance has proven this theory incorrect. Gold is trading at or just below its all-time high prices right now.
With rising inflation and geopolitical turmoil, many investors are turning to gold as the safe haven to a volatile market. Bitcoin is currently 50% lower than its all-time high and is succumbing to an otherwise bearish crypto market.
The benchmark crypto will likely be a popular hedge in the future, but for now, it certainly doesn’t hold the same global trust as gold.
What happens when the value of the dollar falls? Put your money into assets that will likely appreciate in value.
There are a number of different markets for this including fine art, sports cards, and even automobiles.
So let’s take a look at alternative best hedges for a devaluing dollar.
On one hand, these assets can be a risky place to put your money as there is no guarantee the value will rise.
But on the other hand, there is also a reasonable chance that the asset will continue to rise in price regardless of the markets or the value of the dollar.
The alternative investments market is not an easy one to enter either, especially for new investors. Fine art has obvious barriers to entry as the price is often out of the range of a normal investor.
You also need to look into things like legitimacy and ensure it is not a counterfeit. Automobiles need additional costs like insurance and storage. Trading cards have a fairly niche market and rely on player performance and rarity for value.
Conclusion: Best Hedges for a Devaluing Dollar
As you can see there is a long list of potential hedges for a devaluing dollar. Inflation is not a sign to get out of the stock market completely. Rather it is a signal to rotate into other, more stable sectors. Most investors will look to gold as the best hedge, and thus far it has performed this way. This is especially true compared to newer asset classes like Bitcoin. Finally, assets that appreciate in value like real estate and rare collectibles are also excellent hedges, but also come with more barriers to entry and some added risk.