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The Best Investments for a Rising U.S. Dollar

This is a syndicated repost published with the permission of Money Morning. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

The latest Poll of Polls compiled by political expert Professor John Curtiss of WhatScotlandThinks.com suggests a neck-and-neck race with those favoring Scottish independence almost evenly divided with those who don’t. The outcome, which will be decided on Sept. 18, – less than 72 hours from now – is going to lead to a whole host of unintended consequences.

Chief among them is the rise of the U.S. dollar – a move that’s going to take many investors who are fed up with Washington’s meddling by surprise.

Just over a week ago, when the first polls were released showing that the move for independence was gathering momentum, the pound sterling slipped to a 10-month low, trading at $1.6115 against the U.S. dollar. Lloyds Banking Group, for instance, lost £1.7 billion ($2.77 billion) by noon the day the poll was released while Standard Life shares also got knocked to the tune of £400 million ($651 million), as did other companies with similar exposure.

Since then, the British pound has gotten, well, pounded.

best investments for a rising u.s. dollar

The misery is undoubtedly a long way from over.

And if Scotland actually goes through with this? I believe we’re looking at a 5% to 8% collapse of the pound sterling. Perhaps even 10%!

A report by Spear’s magazine and Wealth Insight suggests that one in seven, or roughly 15%, of Scotland’s 22,000 millionaires will leave in this event. There is an almost total lack of apparent thought with regard to financial stability and the already high tax regime in place. A newly independent nation would be devastating to the property markets and an estimated £5 million ($8.14 million) worth of real estate deals would immediately come off the table according to estate agents as reported by the Daily Mail. Public-private infrastructure projects would no longer be backed by the British government and foreign direct investment would grind to an unceremonious halt.

Long story short, a vote for independence is going to unleash a brand new flight to safety as traders make a beeline to the U.S. dollar. Treasuries will rise, rates will fall, and commodities, which are largely priced in dollars, will go with them. That’s because a rising dollar will make everything from oil to gold more expensive. Traders, who are keen to preserve margins and sales, will drop prices almost in lockstep in an effort to keep up.

Rising U.S. Dollar Is an Investing Opportunity in Disguise

For people who don’t put the pieces together like we do, this is going to seem like an excuse to sell out of metals, oil, drillers, and much of the resource sector. Many already are.

But I think that’s a tremendous mistake. If anything, a flight to the dollar is a monster buying opportunity and a tremendously bullish signal for the commodity complex longer term.

That’s because what I am describing is nothing more than a short-term market dislocation. It does not affect how specific resource companies operate nor does it change the underlying demand for their products – which as you know from other columns I have written over the years – is growing by leaps and bounds.

For example…

China has accumulated more than 4,000 tonnes of gold in the past 13 years (and that’s only counting the gold imports Beijing chooses to admit to.) Meanwhile, it continues to buy more, having imported a record 1,108 tonnes in 2013 alone.

Industrial silver demand  has already grown by 5% compared to last year, and is expected to continue to boom thanks to increased use in the photovoltaics industry as solar panels become more common.

The demand for aluminum is set to climb steadily, as China – which already consumes more than a third of the world’s aluminum – ramps up its production of automobiles. Expect additional demand from India and much of South America, too.

While the global demand for gas has grown by 2.7% per year since 2000, the demand for liquefied natural gas (LNG) has risen by 7.6% per year in the same period… and LNG is forecasted by the IEA to meet 25% of the world’s energy needs by the year 2035, up from 21% today.

National economic trajectories and decade-long demographic trends are simply more powerful than any short-term ripples caused by a failing British pound or a rising U.S. dollar for that matter.

But few investors seem to keep this in mind whenever a fundamentally sound industry is rocked by temporary outside forces. And that’s what’s happening with companies that are rooted in (or sometimes even merely connected to) the oil and gas industry.

Take Teekay LNG Partners (NYSE: TGP), Northern Tier Energy LP (NYSE: NTI), and Brookfield Asset Management Inc. (NYSE: BAM). These are industries that deal directly in the fields of oil and gas or, in BAM’s case, manage a portfolio that’s heavy in energy companies. They’ve suffered little dips in stock price ranging from 2% to 3% in the wake of YouGov’s poll.

If Scotland goes solo, these companies (and other enterprises that deal in commodities) will take a hit as the dollar is propped up even further. And that’s a beautiful entry point for savvy investors, especially if they are concerned about the longer term viability of the U.S. dollar, as I am.

That’s because these companies – temporarily out of favor thanks to more expensive commodities – will be back again in a big way once the status quo reasserts itself.

Simply put, with these minor dips we’ve already seen, they’re good “Buy” options. Plus, if geopolitical flare-ups stabilize and the dollar returns to normal, they’re still solid investments, companies with products that position them to ride the wave of the future.

And if the dollar rises even higher? That will signal an even better time to invest.

A Time-Tested Strategy to Play a Rising U.S. Dollar

No doubt many investors will try to time this. But that’s truly a losing game. Timing the markets rarely, if ever, works and the latest data from Dalbar suggests that it costs investors billions in terms of lost opportunity and reduced performance over time.

Dollar-cost averaging is the way to go.

If you’re not familiar with it, dollar-cost averaging is a trading technique that commits users to buying a fixed-dollar amount of a company on a regular schedule, regardless of trends in share price. It’s a strategy that helps its users ensure that they buy more shares at low prices, making their overall investment look like a “buy low, sell high” strategy executed to perfection, especially when we’re talking about a massive dislocation like the pound.

For example, let’s say an investor is attracted to the company ABC. She decides to set aside $100 per month towards buying shares of the company. In August, it’s trading at $20 a share, so she scoops up five shares at $20 apiece.

In September the stock plunges to a mere $10 a share. She buys $100 worth of stock again, owning 10 more shares and bringing her portfolio up to 15 shares of company ABC. By October the stock has rallied to its original price, and she sends in a buy order for another five shares at $20 each. Her portfolio then consists of 20 shares of ABC, worth $400… though she only paid $300 for it because her dollar-cost averaging strategy helped her to buy most of her shares at a lower price.

It’s a strategy that works whichever direction a stock swings… so long as that direction isn’t constantly and consistently downwards. As I’ve said, I expect the stocks of these three companies to continue to drift downward over the next few days, if only by a percentage point or two. Of course, if the Scots surprise the world and go through with their “yes” vote, expect these companies to fall even further before they stabilize.

Any way you slice it, TGP, BAM, and NTI are first-caliber buy opportunities that are blessed with solid management, positioning in the global market to profit from unstoppable economic trends, and, as of this week, discounted prices that mark a window of opportunity.

The Perfect Way to Play This

I recommend that readers use dollar-cost averaging to capitalize on this opening, setting aside no more than 1% to 3% of their capital to purchase a fixed-dollar amount worth of shares of one or more of these companies over the next few months.

In the meantime, one of the great reasons to use dollar-cost averaging comes into play. You can watch the prices fall without any sense of trepidation if you use it. And, if prices somehow fall sharply over the next few months? Great – you can scoop up even more shares at a bargain price as long as you stick to both your “schedule” and your purchasing. If they climb unexpectedly quickly? That’s fine, too – you’ve locked in profits!

Either way you potentially win BIG knowing that you’re smarter than the investors driving the selling in a fit of short-term panic.

NOW: There’s a dangerous “Helicopter Money” delusion spreading around Wall Street. Here’s the truth behind this radical idea that’s gaining popularity…

The post The Best Investments for a Rising U.S. Dollar appeared first on Money Morning – Only the News You Can Profit From.

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