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.
