Asset Class: Foreign Government Bonds

DON'T LIKE IT    

Some foreign governments have similar advantages as the U.S. in that they can borrow substantial sums in their own currency and can create new money to fulfill prior obligations.  Thus, some investors view high quality foreign government bonds as a good hedge against a decline in the value of the U.S. Dollar.  There’s no question that a hedge exists, but in our view it is probably not the hedge you really want.

Our concern in hedging against a fall in the value of the U.S. Dollar is not about how it performs relative to other currencies, but how much purchasing power the currency has.  So it’s not important how many Euros or Yen you can trade for your Dollars; what matters is how many goods and services can be purchased for the same number of U.S. Dollars today vs. tomorrow.  Foreign government bonds do not provide this protection, because the foreign currencies themselves may be losing purchasing power at the same time.  A shift in the exchange rate may appear to favor one currency over the other in this scenario, but that’s like a boat sinking more slowly than another; the problem at hand is not the speed of descent, it is the descent!

So an investor truly concerned about the value of money (as opposed to the exchange rate versus other currencies) should prefer to own real assets that should appreciate when the value of money declines.  This means physical assets such as gold, commodities and land, not financial obligations dependent on the value of the money you’re trying to protect.

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The preceding is an excerpt from the Modus Advisors Special Report titled, "Like It or Not? The Modus Advisors approach to Asset Class Investing".

You can download the complete report here.

We also have a podcast discussion of the report available here.