Norwegian Kronor or Not?

A friend recently solicited my opinion on the purchase of Swiss franc or Norwegian kronor as a safe strategy against inflation rather than purchasing gold.  The following is my response.

As to the Swiss franc and the Norwegian kronor: conservative, right-wing media outlets, including Internet sites, have put out a lot of hyperbole over the past six months or so stating that the franc and kronor are safe harbours for monies originating from investors in the United States. This has caused, in my opinion, the franc and kronor be oversold the same as gold has become. Let us think about this issue for a few minutes: what good is gold? You cannot eat it, you cannot drink it, you cannot produce anything beneficial with it. To obtain gold, one has to dig it out of the ground, pollute the earth with very toxic chemicals in the refining process, and then dig another hole in which to hid the refined gold. My attitude is the same for currency. In and of itself, it is useless and has no value.

Let me explain this last statement so that your thoughts are clear on this subject: currency is only useful if it can be moved around between individuals in the marketplace. For instance, if you were to purchase, say, 500,000 Norwegian kronor and put these into a vault, of what use is that? You might as well put the equivalent cash in U.S. dollars into the vault. As far as utility is concerned, the end result is the same. What if, in two years from now, the market for kronor vanishes. Then your investment is worth less than what you paid, and you have gained no incremental value whilst holding the currency.

Having said all of that, consider that I am holding some British Sterling Pounds. Currently, that currency is in an account open to the fluctuations in the US$/UK£ exchange rate. I am not doing this because I am speculating on currencies or on commodities. This is because I am accomplishing three things: first, the UK£ is appreciating at a rate of about 7% per year against the US$, which is not too bad for a relatively conservative position; second, I am betting against both the U.S.$ and the U.S. economy; and, third, when the U.K. stock and bond markets adjust to be more in line with my investing criteria, I will invest directly in U.K. companies using U.K.£. The benefit of this last point is not to be lost. Appreciation of the shares, or bonds, held in U.K.£ will be magnified against the U.S.$. Also, the dividends on the stocks and interest on the bonds will be paid in U.K. £. Again, the gains will be magnified against the U.S.$. Whilst this investment strategy is subject to the vagaries of the exchange rate, as long as the exchange rate remains above a certain level, I am in a winning position. Compare this philosophy and plan with the concept of holding commodities. Commodities gain nothing in the end. Speculating on foreign currency will only have negative long-term consequences. Investing using foreign currencies in foreign markets will provide a positive long-term result.

One more point in the philosophy of investing using foreign currency indicates a considerable benefit: diversification across economies and geopolitical boundaries. This can only be a good thing.

Investing requires a mind set different than being an entrepreneur, speculator, or gambler: you must have titanium nerves, look to the very long-term, which means more than 20 years, and be a grouchy contrarian.

Nathan A. Busch

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