As many financial analysts have been anticipating, the US dollar is beginning to rapidly decline in value.
On Thursday, the dollar fell sharply against most major currencies, with the ICE Dollar Index dipping below 90 points for the first time since 2018. The index, which measures the value of the USD against 6 of its biggest rivals, is down almost 7% this year already.
The ICE Dollar Index YTD (Bloomberg)
Not only has the Federal Reserve churned out trillions of dollars in COVID relief money, but precious metals have been steadily rising over the past two years. It would seem that investors are finally becoming wary of the atrocious US debt, savings, and fiscal spending imbalances.
Although many investors flocked to the safety of the world’s reserve currency amidst the turmoil of COVID-19, the unprecedented quantitative easing measures taken by central banks are starting to show side-effects.
The Writing on the Wall
The general consensus is that the USD will continue to decline entering 2021. But some are even more bearish when it comes to the dollar.
Ulf Lindahl, chief investment officer of currency manager A.G. Bisset, is one of the dollar’s most pessimistic soothsayers. Lindahl foresees a 36% drop in value against the euro over the next two years, with dire implications for the overall economy. “This is the beginning of a very large move,” he says.
Speculators are betting against the dollar (Reuters)
He’s not the only one to express his concerns. Paul Franke, a widely published investor and consultant, wrote for Seeking Alpha that, “contrary to all the bullish and confident gibberish you hear on CNBC or read in the WSJ, the U.S. dollar is already falling in value vs. foreign paper currencies.”
Franke goes on to issue a warning. “What if the coronavirus pandemic lasts longer than expected into the middle of 2021, and money printing remains at sky-high levels to prevent economic catastrophe?”
It’s clear that experts have some very legitimate reservations about the underlying value of the dollar. But what are the long-term implications?
A Boon for Commodities?
A tanking US dollar would put a serious crunch on purchasing power, both in the US and internationally. It would also have a corrective effect on oil prices, which have taken a dive this year.
A weak US dollar has far-reaching implications. But one of the most interesting for investors comes in the form of strengthened commodities markets.
Commodities have faced a sluggish year. Not only was global trade hampered by the pandemic, but the overall commodities markets are coming off the rise of China.
Some commodities have fared better than others this year (SeekingAlpha)
Nonetheless, major players like Goldman Sachs foresee a bullish market for commodities entering 2021. Between the weakening dollar and the promise of further stimulus packages, analysts at Goldman predict an upswing in commodity markets.
They cite three major factors: “structural underinvestment in the old economy, policy-driven demand and macro tailwinds from a weakening dollar and rising inflation risks”. These factors will affect everything from the price of oil to textiles to agricultural goods.
There’s another side effect of a weak dollar that may be interesting to those seeking foreign investments: USD inflation will make it easier for emerging markets to service their dollar-denominated debt.
This could breathe new life into ailing, debt-riddled economies like Argentina. It could also provide a boost to well-positioned emerging markets like Colombia to get a leg up on the competition.
But what does it mean for retail investors?
Benefitting from an Inflationary Environment
What are the best ways to benefit from the coming inflationary storm?
Obviously one play would be commodity futures. If Goldman is right and commodities spike, futures could be an attractive option.
Shorting the dollar would be another. Seeking Alpha doesn’t mince words, recently publishing an article titled “Time to Short the Dollar”. But not everyone is into the Forex game.
It’s possible to reap many of the benefits of a weakening dollar, as well as hedging against inflation, with a single asset class, one that has been around since the beginning of civilization – farmland.
Our favorite graph – the NCREIF farmland index vs. inflation
Farmland – especially in emerging markets – is an excellent store of wealth when inflation comes around. This is doubly true when traditional alternatives like gold and conventional real estate seem crowded and overbought.
With farmland, you can also gain exposure to the bullish commodity markets predicted by Goldman Sachs and others, without having to gamble on futures or other instruments.
Without having to gamble at all, really. Historically speaking, farmland has been one of the most consistently high-performing asset classes of all time. Busts are few and far between, and mostly concentrated in places where farmland can become significantly over-leveraged, like the US.
So where to look? As we’ve mentioned before, inflation often hits emerging markets before developed ones – especially those whose economies depend heavily on oil exports.
When the price of oil goes does, the dollar rises in value against many EM currencies like the Colombian peso (Banco de la Republica)
In countries like Colombia, the COVID-19 oil glut caused a significant devaluation of local currencies against the dollar. Although this trend is currently correcting, the exchange rate offers favorable opportunities.
But there’s another advantage to holding emerging market farmland if the dollar tanks – the chance to export to markets whose currencies are strong against the dollar.
For example, if Ulf Lindahl’s predictions are correct and the euro looks strong against the dollar, it will create a huge opportunity for businesses that export to Europe but pay costs in local currencies. This is doubly true for farmland.
Farmland as an Inflation Hedge
When inflation concerns begin to mount, investors often retreat to alternative assets. Gold, real estate, inflation-protected securities – all these can be effective options. There are even some brave souls who are trying to invest and make profits on gambling sites not on Gamstop. But if you’re looking for real, tangible assets with the potential for appreciation and cash yields, look no farther than farmland.
The right type of farmland can depend on a variety of factors – potential for appreciation, logistical access, soil quality, climate, political risks, the commodity in question, markets, consumer perception, sustainability factors, and more. Farmland due diligence is an exhaustive and multi-faceted process.
But when inflation comes around (we’re already starting to feel the tremors), you’ll thank yourself for parking your capital in an asset class that is insulated from the downward pressure on the dollar.