What if the Australian Dollar Was a Stock?

By MoneyMorning.com.au

It’s amazing the places you can pick up investing ideas.

Your barber (or hairdresser). The butcher. The postman…

And even from a millionaire art gallery owner – if you happen to know one.

Of course, we’re not saying they’ll give you good advice. But it’s worth listening to, just on the off chance you can use it.

As it happens, the advice from one particular art gallery owner is worth listening to. Especially because she used to be a foreign exchange trader at a major hedge fund…

The advice she gives is something every Aussie investor tied up in Australian dollar assets should consider. If you want to protect your investments from a major market collapse… and potentially profit from it.

Insider or Smart Trading?

First, the person we’re talking about is Kashya Hildebrand. You’ve probably never heard of her. And neither would we if she hadn’t made a large currency transaction last August, just a few weeks before her husband caused the Swiss franc to crash 20%.

Reports in the press claim she made “tens of thousands” of dollars on the trade.

High fives all round. The only trouble is…

Kashya Hildebrand’s husband is Philipp Hildebrand. Until recently he was president of the Swiss National Bank (SNB). It was his decision late last year to devalue the Swiss franc as it surged to a record high, causing problems for Swiss exporters.

Ms. Hildebrand says her currency trade was a coincidence. That her husband didn’t know about it. And that she didn’t know the SNB would soon devalue the Swiss franc.

But, the denials weren’t enough. A couple of weeks ago, Mr. Hildebrand resigned his post after news broke of the currency trade.

We don’t know if the trade was a coincidence or an inside job. But the reason for the trade is believable. In an interview with TV station Schweizer Fernsehen, Kashya Hildebrand said:

“In order to get the liquidity in the account to a 50% level, dollars were purchased just as a conservative idea for this portfolio…”

What a Millionaire Art Dealer Taught Me About Investing…

The idea was for the Hildebrand family to reduce its exposure to currency fluctuations. With a 50/50 split between U.S. dollars and Swiss francs they would have had a neutral position against currency movements.

If the value of the U.S. dollar fell, the Swiss franc would rise, and vice versa.

It’s a strategy most Aussie investors should think about now. And fortunately, there’s a pretty easy way to do it…

What if the Aussie Dollar Was a Stock?

If you’re like most Aussies, 95% (or more) of your wealth is tied up in Australian dollar assets.

That’s a big risk. As the chart shows, the Aussie is back to a long-term high:

Click here to enlarge

Source: Google Finance

If you treated the Aussie dollar as a stock, you’d probably look at the chart and think, perhaps I should sell here.

Yet most of the commentary and opinion we see says the Australian dollar is going even higher… supported by the resources boom and a free-spending China.

We’re not convinced. The Australian economy has had a dream run. But even dream runs come to an end. And when they do it can take a long time to recover.

That’s why it now makes sense to shift some of your assets away from Australian dollars and into something else. One way of doing that is gold – a strategy we’ve long recommended. But there is another way. You can use an exchange traded fund (ETF) to bet on a falling Aussie dollar.

How to Short-Sell the Australian Dollar

It trades on the Australian Securities Exchange as the Betashares U.S. Dollar ETF [ASX: USD].

It’s quite simple. If, like us, you figure the Aussie dollar could come a cropper this year, you can buy shares of the USD ETF. And as the U.S. dollar rises against the Aussie dollar, so the value of the ETF will go up… and you’ll make money.

If the Australian dollar goes up against the U.S. dollar, the ETF will go down and you’ll lose money.

There are other ways to do the same thing, such as using CFDs or exchange traded options. But both of those involve leverage. That’s fine if you’re looking to make a big punt on currency movements. But if you just want to hedge all or part of your portfolio, an ETF should be a safer bet…

And you’re less likely to be tempted into taking out a big leveraged position.

As we say, if you treated the Australian dollar as a stock, it would be flashing a sell signal right now. Our advice is, when you see an alarm go off it’s foolish to ignore it.

Cheers.
Kris.

[Ed note: In yesterday’s Money Morning Dr. Cowie was talking about how much better tungsten has performed compared to other commodities, with a 35% gain last year. Tungsten is traded in the form of APT. This stands for Ammonium paratungstate, and not adenosine triphosphate as accidentally added by a colleague. The former is good for hardening drill bits and bullets. The latter is good for supplying your muscles with energy when you are sprinting – so not much use for commodity investors interested in making money on strategic metals!]