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SOVEREIGN MAN

Is there a ‘best’ currency to hold right now?

January 6, 2012
Santiago, Chile

We recently received a great question from a reader, Chuck, who asked, “Simon, I’m going to HK in 10 days to open a bank account, and I know there are options to do this in several foreign currencies. What foreign currency would you recommend to hold over the longer term?”

I could never make a personal recommendation as I’m not a financial advisor, nor do I know the details of your situation. But let’s review the options.

First off, Hong Kong is an excellent place to bank. One of the best in the world, in my opinion… and I say that as someone who keeps a lot of money in Hong Kong. Why? Because the banks are strong, stable, innovative, and well-capitalized.

I have far fewer concerns about a bank going under in Hong Kong than I do in the US or Europe. And in Hong Kong, with just a few clicks, I can move money into gold or any number of currencies.

It’s quite easy to open an account in US dollars (USD) in Hong Kong. Now, the downsides of holding USD are clear– continued expansion of the Federal Reserve’s balance sheet coupled with excessive spending habits of the US government make it an increasingly worthless piece of paper in the long run.

There is a flip side to this view, though, as we have discussed before. Historically, the USD has been viewed as a safe haven currency. When things get bumpy in financial markets, financial institutions and foreigners tend to hold dollars.

It’s bizarre to view the biggest debtor in the history of the world as safe, yet this is due to a few factors– the dollar’s free-floating convertibility; the ridiculous size of the US dollar (and bond market) which makes for easy liquidity; and the US government’s guarantee to never default (by simply printing more).

Hong Kong banks also offer a plethora of other currency options– like the Singapore dollar, Australian dollar, Korean won, Canadian dollar, and in some cases the Norwegian krone.

These are typically export-oriented countries with healthier balance sheets. They have better fundamentals and a much brighter future. In a sane, rational world, they are the obvious choice… and still make sense with a much longer-term view.

Unfortunately, we don’t live in a sane, rational world. And the choice is a constant tug-of-war between the deeply flawed safe haven status of the US, and these smaller, healthier economies. As such, the foreign exchange markets are extremely volatile.

Trillions of dollars move in and out of currencies each day depending on the prevailing rumor.  One day the dollar is surging, the next day it’s tanking. The euro and pound are getting beaten around like some third world peso. It’s embarrassing, really… this is supposed to be the pinnacle of finance.

One compromise that is worth considering is the Hong Kong dollar (HKD). Pegged at 7.80 HKD per USD for several decades now, holding HKD is essentially the same as holding USD. There is a very narrow band of volatility, but it’s a tiny rounding error.

If the USD’s safe haven sentiment holds, the HKD will be a good place to be as it will appreciate against other currencies and commodities as well. If the USD slides into oblivion, you can safely bet that the Hong Kong (i.e. Chinese) government will make a one-off revaluation of the peg.

In this way you can essentially maintain the upside potential of holding US dollars, but limit the downside risk.

Next, Kay writes, “Simon, I’m scheduled to soon fly to Ecuador to look at property to invest in as a step in internationalizing my resources and setting up a possible place to escape to if necessary. What are your thoughts on the country?”

I like Ecuador. It’s incredibly cheap and really beautiful. Quito and Cuenca are lovely cities. But given the government’s long-term track record of instability and populism, it does merit some caution.

In my view, small property holdings are fairly low risk. I wouldn’t want to make a target of myself by buying a 1,000+ acre farm in Ecuador, but a few acres or an apartment in town are pretty harmless.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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Comments on this entry are closed.

  • Contrarianism

    I my view, we are going to get exactly the opposite of what everyone (including Simon Black and Tim Staermos) expects.

    The consensus opinion is inflation, which certainly seems to be the logical byproduct of running the
    printing presses 24/7 and flooding the markets with liquidity. It also makes sense that as currencies are getting debased and going down then gold will continue to rise and provide a good safe haven. However …

    If history has taught us anything it has taught us to expect the opposite of what the majority believe will happen. The opposite of inflation is deflation, and in a deflationary environment the world will hemorrhage, convulse, and de-lever. Every asset will fall in price, including our beloved precious metal.

    In a deflationary environment cash is your best friend and is king, and the thing we fail to remember about currencies is they are all relative. Yes, the USD is turning into monopoly money, but when the world is all playing the “same board game” the currency that goes down the least in comparison to its rivals will be
    the winner. As counter-intuitive as it may sound, the U.S. Dollar
    just might just be the cleanest dirty shirt in the laundry basket,
    and if this turns out to be true, then holding USD (not gold) will be the smart contrarian play.

     -  Contrarian 

    • Dr. Strangelove

      Contrarianism -

      Why don’t you re-read what Simon just said about the HKD.

    • TerryNeudorf

      Let me get this straight … so you’re saying that all the pumping of the money press is going to INCREASE the value of our dollars?  Weimar Germany, Zimbabwe, Argentina, et. al.  must have never happened.  Someone tell Bernanke, quick, to clone those presses and inject say, 500 trillion new dollars into the economy.  I need the few bucks I have left to be worth infinitely more, and quick!

    • Anonymous

      The Federal Reserve tried deflation back in the late 1920′s/early 1930′s. They aren’t going to go down that road again.
       
      In the 1970′s they ran into stagflation. They aren’t going to go down that road again.
       
      What other roads are left for the Federal Reserve to travel?

    • Kid

      I agree that the currencies all over the world will deleverage as a result of our current debt bubble. My question than is do you really think the banking families of the world are going to allow that to happen. I think they will for a while until the thing is about to implode then they will use fear and propaganda to prop up the money changers with more printing then they can go on an asset shopping spree. This will happen only after we have been sucked dry by our fascist government and the IRS and the families  that control it. So deflation is a given along with metals going down meanwhile the central banks will buy gold at this discount. Then hyperinflation will be implemented.

    • guest

      Most mainstream economists agree with your deflationary angle though. The keynesians, monetarists and MM theorists think deflation is the real risk. These people are legion. So even though it seems like there’s an inflationary echo chamber on this site and many others, it’s still not a mainstream viewpoint to hold. The inflationary risk is still the contrarian viewpoint. 

  • Sodexho

    Simon, thank you for your great website. Regarding Obama-care, from what I was reading, the IRS is in charge of enforcement of this goon-draconian health care and people who do not have health insurance get fined if they do not have insurance. I know that Government fines do not get smaller, they get BIGGER with time. So my reasoning, correct me if I am wrong, is the following. NO helath care insurance = FINES = IRS ENFORCEMENT = CANT PAY THE FINES? = GO TO JAIL FOR FAILURE TO PAY THE IRS??? = OR YOUR FINANCIAL ACCOUNTS GET FROZEN???  Simon, what do you think?

  • clickoff

    Simon:
    Regarding a Hong Kong bank, I tried to open one about a year ago, but was required to have a HK address and produce a utility bill.  Since I was not living in HK, they would not allow me to open an account.  I also tried to open accounts at The Storage and Boom Securities.  
    Is there a way around this dilemma?  I like HK a lot and traveled there frequently while living in mainland China.

    Any suggestions greatly appreciated.  I very much like these missives.  

    • Jones

      Clickoff,  You can open a Singapore account with HSBC and do it here in the states without having to go there.  You have choices of only SGD or there are other currencies available.  Contact the HSBC offices in upstate New York and they will send you the forms…

    • Earth67mars48

      I had the same problem in Canada. The only Canadian bank that will let you open an account with a non-Canadian address is RBC-but you must have a US drivers license and passport.

      • Guest

        I opened a TD account in Toronto without having proof of address. The first branch I went to wouldn’t open the account, but I walked a few blocks, and the second one didn’t give me any problems. I think it’s more of a branch-to-branch problem. Some managers don’t understand the rules and regulations and will just (politely) show you the door rather than risk running afoul of some esoteric law. 

  • bill f

    Quito is marvelously cheap and yes, the government is unstable, but the people soldier on regardlessly. This won’t be true in the US. Crime is already exploding and the place is turning into a police state. First your money goes, then your freedom, then your property. I sure hope people know this. I know people who held on to their homes outside of Buenos Aires during the crash period, and the family still has it. So if they can do this, certainly individuals can survive almost anything.

  • Sdesse

    As Mish’s would say Gold is money :)
    + you cannot print gold

    So you’re right cash is king in a delationary environment but Gold is just cash and will do well (hold most of it’s value) too. It will also do good in an inflationay context so you get two edges for the price of one.

    On the other side it’s not as liquid and easy to use as USD and you have to try to buy it out with the right timing to have a maximum of it for a give price.

  • Crusader79

    Contrarianism – you might very well be right, but there’s no way to say for sure. That’s why Marc Faber is recommending 25% each in precious metals, equities, property (primarily Asian) and cash. That way whatever happens your wealth will be protected to some degree.

  • Eking51

    I opened a bank account in Hong Kong in NYC without traveling to HK which allowed me to transfer funds from my USA account to HK account and hold the funds in swiss francs all via internet banking.Warning the HK branch workers do not speak or understand english well enough to communicate intelligibly with you.

  • PROXIMO

    Idiot. It’s 2012.

  • http://freecanada.wordpress.com/ Paul Repstock

    Contrarian has a point. However all of you should consider what you are attempting. Most of the evils in this modern world have been perpetrated in the interest of maintaing the status quo. ie. Conservatism!
    Things do not stay the same. Change is constant. Occasionally, we have a complete paradigm shift. All your worry and carefull planning may be for naught. In the end, each of us will die. Perhaps rather than try to hedge our personal futures, we should be trying to make the entire world a happier place???
    Here is a good article: http://wlcentral.org/node/2411

  • Chuck B.

    Hi Simon,

    Thanks for the reply to my questioon. I just returned from HK and the process to open the account was easy, just needed a passport, utility bill and a $2000 HKD or $260 USD initial deposit. I recommend putting more in to avoid any service charges; depending on the minimum balance required for the type of account you select. I’m impressed with the variety of products & services offered with the HK account. They are way ahead of American banks. Very happy I made the trip.

  • BRCosin

    Forgotten the Mongolian Tug^rik?

  • jaf

    One problem with buying real estate in the third world such as Ecuador is the fact that the investment is fairly illiquid. Selling a house or farm in Ecuador takes a very long time and at the high price range could take years and years if you ever find a buyer. 

  • Whwwaynewill

    What does “one-off” mean? How am I protected against a sinking dollar by a currency  that is linked to it? And comment on converting to Singapore dollars….?

  • Bruce

    Brazil is a better option. Real Estate is booming there and property owner rights are some of the most solid in the world. Brazil has a stable government and with a $75k investment in property you can get citizenship and a place to stay during world cup and olympics (or rent it out for prime $$)

  • Trig Gamble

    I have had a few business associates mention to me that they had purchased the Iraqi Dinar in anticipation that the IMF or other currency regulator was going to re-peg the Dinar and that there was a “wind-fall” to be made.  That sounds like a “hustle” to me and I think my associates are “snowed” or being “conned”. Am I right? Or is there a potential “pony” in this pile?

  • http://www.animalsdinosaursandbugs.com/The-Future.htm Peter Legrove

    Just be careful in HK I
    had a problem with the a bank and I wrote a letter to the regulatory
    body and the banks reply was “There is no objective proof to
    substantiate your claim that…” that basically means bank staff
    can say what they like with impunity. I was complaining about what
    was said in the bank and that is their reply. She just denied what
    was said and there were two bank staff involved. Also in HK the
    deposit protection scheme is only up to $500,000 HK which is less
    than a $100,000 US and I don’t think it covers paper gold, only
    currencies. In Singapore it is I think $30,000 SD which is less than
    HK. At the moment Singapore is positioning itself as a financial
    center while HK has done very little. Just recently Singapore has
    brought out a “Code of Ethics” for private banks, customer
    knowledge assessments and you can check if your financial investor is
    registered online. All that has happened in HK is the SFC brought out
    a TV advertisement warning investors that once they agree to
    an investment via an adviser they are saying they understand the
    advice given to them.

    Also the interest rate in HK
    is nothing to write about. I don’t know what it is in Singapore but
    in mainland China you can get up to 7.5% for term deposit but at the
    moment the govn is lowering interest rates. I’m waiting for summer
    so I can go to Mongolia and check out the 13% interest rate up there.
    But right now it ‘s in the middle of a blizzard at about 40 below
    so I’ll wait. In China I haven’t heard of any deposit protection
    but everybody says the govn will not let the banks fail. Well, I hope
    they are right. In the banks in the main centers there are English
    speakers so it is pretty easy to open an account. Also for Americans
    I’m sure they won’t tell the tax department about you. I think in
    HK they do.

    Get a China visa before
    you come so you can run across the border have a look at the next
    financial superpower. If you are really into speed you can jump on
    a high speed train. Actually Chinese New Year is coming on the 23rd
    I think, a bad time to travel in China. The greatest migration on the
    planet is underway. But getting from HK to Guangzhou is usually okay.

     

  • Hiday_happy

     simon you’re great,just wait for 2years then i will go to thailand

  • Peter

    Printing money doesn’t cause inflation. It’s the increased spending of money that causes inflation.

    When too much money was made available for mortgages, house prices inflated. Even though the Fed has created $Trillions of dollars, the money isn’t changing hands. It’s sitting idle on banks balance sheets. No velocity = no inflation.

    Maybe one day there will be runaway inflation, but so far it hasn’t happened.

    • mikegmn

      “No inflation”..? I guess you haven’t bought a happy meal ar McDonalds lately, or a gallon of milk, a pound of beef, or a two pound can of coffee. You must not have a car – gasoline has doubled in price in the past five years and repair shop rates have gone from $45 or $48/hour to $100/hour or more. The $9.98 steak dinner special of five or six years ago now buys you a basic hamburger and fries, and your 75 cent coffee is now $2 or $2.50!

      What color is the sky in your world? You must work for the federal government.

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