Protect your investments from the 60 cent Loonie.

Loonies

A number of investment strategists such as David Rosenberg believe that we are headed to a Canadian dollar that is worth 60 cents US or less.  Read the recent Financial Post article here:

Rosenberg – 60 cent Loonie

By the way, Rosenberg was one of the few investment strategists who foretold the recent stock market sell off, well before it occurred.

There are three reasons why this may occur:
1. The Covid 19 induced Canadian public and private debt load is hitting 350% of GDP, amongst the highest in the world and comparable to those financial bastions Greece and Italy. It is going to get very difficult for many to pay the debt obligations during the recession that we are already in.  Newfoundland for example is essentially bankrupt and will only be able to keep the lights on with a Federal bail out.
2. The Canadian balance of payments is in serious deficit with no hope of improving (particularly with oil so low) and has been for years, one reason why the CAD declined from 100 cents US in 2011-2012 to the present 71 cents US.
3. The CAD is not a Reserve Currency, and as a result the Government can only print so much money before investors begin to worry about default and look for safer places to invest, such as the US.

I am reminded of visiting Florida in winter 2002, when the CAD was trading at 62 cents US. That meant that it took $1.60 CAD to buy a USD. Luckily we were able drive to Florida and stay at my parents condo, because we couldn’t afford much else. I remember our big night out was getting a pizza and our day adventures were confined to visiting the State Parks which had free entry. Thank goodness a 1.75 liter jug of tequila was only USD 20 at Costco.
So, if you do want to protect your investments while the Loonie tumbles, or plan on visiting Florida or other parts of the US when this Covid crisis is over, you need to prepare now to insure yourself and your investments against the likely downward spiral of the Loonie. Here are two strategies to do so.

1. Buy US dollars. But not through your bank or Foreign Exchange dealer. Instead, purchase a unique ETF, the Horizons US Dollar Currency ETF, symbol DLR. DLR is sold in CAD but its value is tied directly to the USD. If the CAD drops against the USD, then DLR will increase by an equal amount. And here is the interesting part. Should you actually need US dollars to spend, you can ask your broker to “journal” the units to the USD side of your account at NO cost to you, where they become DLR.U, and can be sold for US dollars. Of course, this works best in a low cost online brokerage account and is really only worth doing if you are exchanging $10,000 or more. This bit of financial maneuvering is known as Norbert’s Gambit. You can read a detailed explanation of how to do it here:

Norbert’s Gambit

2. Buy Gold. Because gold is denominated in USD, your investment is protected against depreciation of the Loonie. In addition, many strategists believe that we are at a time in the economic cycle where gold will rise substantially in value over the next few years, as paper currency is debased because of the massive printing of money by all governments. I recently wrote two posts on gold as Portfolio Insurance, so I won’t repeat myself. But if you haven’t read these posts I suggest that you do so here:

Gold Portfolio Insurance

As always, conduct your own due diligence and consult a certified investment adviser, before undertaking any investment. All investments entail risk, and currencies can be risky and volatile, as the recent experience of the Canadian dollar illustrates.

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