I've mentioned in the past that those who prefer a gold hedge might want to consider GLD as an ETF equivalent. But I've not personally made that plunge. While I don't mind metals as a commodity play, I'm a little nervous about gold's volatility as well. The stock market is very much a pricing of future performance. And typically a drop in overall economic performance would suggest a drop in the dollar against other major currencies. However, I think we are in a unique situation. While I expect more volatility in the broader market, I expect even more volatility in overseas markets. The US markets appear more advanced in this financial drama than our foreign counterparts and that is why the dollar has been gaining in the last several weeks. Further, we are likely to be out of this mess in the first half of 2009 while some foreign markets will not rebound as quickly.
After a long battering of the dollar over the last couple of years, the dollar has certainly taken a turn up. Two thoughts bring me to a currency play. First, currency trends tend to be long. While the peaks and valleys aren't obvious, once the trend starts it usually represents a significant economic shift. Second, the US economy has been well beaten down. At this point any additional losses in the market will likely see equivalent or greater losses in foreign markets. Again, a weak US market still trumps a weaker foreign market. Hence, the dollar will rise further.
If you buy in to my bullish dollar sentiment, you might consider an investment in UUP as a hedge to your market positions. The UUP is an ETF that paces the dollar against a basket of currency futures. If the dollar strengthens, UUP rises.
While interest rates are increasing in some areas and might be worthy of a cash investment, I still prfer a broader approach. And I think the dollar is coming back.
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