Sunday, June 10, 2012

Alpha-D Currency Diversification for June 2012

I did it.  I contemplated this move for many months and finally executed last Friday during market hours.  I added foreign currency diversification to my Alpha-D portfolio with long positions in CurrencyShares Australian Dollar Trust (FXA) and CurrencyShares Canadian Dollar Trust (FXC).  I can explain this fairly radical departure.

I like what John T. Reed has published on the desirability of holding currencies other than the U.S. dollar as hedges against hyperinflation.  He correctly identifies several countries that rank high on Transparency International's list and low in relative debt-to-GDP ratios.  My tactical approach to holding the currencies differs from Mr. Reed's.  He advocates opening cash accounts with banks in each of his chosen countries.  I chose instead to hold ETF securities that represent cash holdings of currencies held in trust outside the U.S.

I reserve the right to add CurrencyShares Swiss Franc Trust (FXF) to my holdings but I suspect the Swiss central bank will continue its efforts to hold down that currency's value relative to the euro.  That's why I sold puts underneath FXF, as I suspect central bank action may drive its value lower relative to the dollar (as well as the euro).  I read the prospectuses on the CurrencyShares website before I made these choices.  The good news about these ETFs is that they are physically held outside the U.S., beyond the reach of confiscation and capital controls should the U.S. government enact those policies.  The potentially bad news is that JPMorgan is the depository for the currency.  In the event of JPM's bankruptcy, holders of the ETFs would be considered unsecured creditors of JPM and could suffer partial or total losses (hmm, shades of MF Global).

There is no way to mitigate the risk of JPM going bust.  The only consolation available to me is the possibility that the U.S. government will selectively backstop the balance sheets of systemically important institutions, and JPM appears to be one of the favored few.

I would like to take a position in New Zealand's currency but I can't find an ETF that represents holdings there.  I am not about to book a flight there just to open a savings account.  I may add more cash to my long positions in FXA and FXC in the near future.  Alternatively, I may not do so if I find some good hard asset stocks.  It's my money and I'll protect its value any way I like.

Full disclosure:  Long FXA and FXC with covered calls; short cash-covered puts under FXF.  No other non-U.S. currency holdings at this time.