by George Tucker

Created on: April 09, 2009   Last Updated: March 12, 2010

Hedging against long-term dollar decline

During times of economic turmoil, as the US Treasury issues record amounts of debt and the Federal Reserve Bank keeps injecting liquidity into currency markets, the specter of inflation looms. Inflation is the greatest long-term threat to purchasing power. Long-term economic stagnation can also weaken a currency against its foreign competitors - which leads to rising import costs. Oil prices are denominated in dollars so a weakening dollar means rising oil prices, which have a ripple effect throughout the economy and cause price increases on virtually every consumer good.

Regardless of the particular threats to the dollar's dominance, it's relatively easy for the savvy investor to hedge against long-term dollar decline. The strategies discussed will be limited to those that can be implemented by the average investor (no double-condor strangle butterfly options strategies will be recommended).

Non-investment methods of hedging against dollar decline

Many average people are concerned by economic uncertainty. They don't want to see inflation corrode the value of their savings and investment, leaving them increasingly poor with each passing year. When they ask for advice, usually they're told, "Buy gold." On more extreme survival-oriented forums that are currently enjoying a surge in popularity, they may be told to sell their stocks and buy food, firearms, ammunition and medical supplies.

This is not only terrible investment advice, it's not even practical for most people. In order for anything to be considered an "investment," it must be easily valuated and highly liquid. This rules out virtually every physical store of value other than currency. No one is going to barter a Krugerrand for a tank of gas, or a box of bullets for, say, cab fare. While it's true that these goods are relatively stable stores of value, food and medical supplies expire. Ammunition has a long but limited shelf life. Firearms are highly regulated, difficult to value and "thinly traded" (meaning that supply and demand have an out-of-proportion influence on their price). None of these purchases will pay a dividend.

If you expect the imminent collapse of civilization, then by all means fill your basement with shotgun shells and pork-n-beans. Otherwise, stick to financial instruments for your investing.

The problem with hedging in dollars

There are some inflation hedges available that are specifically designed to preserve wealth. A special kind of bond

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